UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2017
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-36903
KORNIT DIGITAL LTD.
(Exact name of Registrant as specified in its charter)
Israel
(Jurisdiction of incorporation or organization)
12 Ha’Amal St.
Rosh-Ha’Ayin 4809246, Israel
(Address of principal executive offices)
Guy Avidan
Chief Financial Officer
Kornit Digital Ltd.
12 Ha’Amal St.
Rosh-Ha’Ayin 4809246, Israel
Tel: +972 3 908-5800
Fax: +972 3 908-0280
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary shares, par value NIS 0.01 per share
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
As of December 31, 2017, the registrant had outstanding:
34,124,223 ordinary shares, par value NIS 0.01 per share
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
☐ Yes ☒ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
☒ Yes ☐ No
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See
definition of “large accelerated filer, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer: ☐
Accelerated filer: ☐
Non-accelerated filer: ☐
Emerging growth company: ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not
to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the
Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☒ U.S. GAAP
☐ International Financial Reporting Standards as issued by the International
☐ Other
Accounting Standards Board
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ ITEM 17 ☐ ITEM 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
USE OF TRADE NAMES
CERTAIN ADDITIONAL TERMS AND CONVENTIONS
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
ITEM 4. INFORMATION ON THE COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8. FINANCIAL INFORMATION
ITEM 9. THE OFFER AND LISTING
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
ITEM 16H. MINE SAFETY DISCLOSURE
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
SIGNATURES
INDEX TO FINANCIAL STATEMENTS
1
2
2
3
3
3
24
43
43
61
83
87
88
89
105
106
107
107
107
108
108
108
109
109
109
109
110
110
111
111
111
112
F-1
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information included or incorporated by reference in this annual report on Form 20-F may be deemed to be “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are often characterized by the use of forward-looking terminology such as “may,”
“will,” “expect,” “anticipate,” “estimate,” “continue,” “believe,” “should,” “intend,” “project” or other similar words, but are not the only way these
statements are identified.
These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that
contain projections of results of operations or of financial condition and all statements (other than statements of historical facts) that address activities, events
or developments that we expect, project, believe, anticipate, intend or project will or may occur in the future. The statements that we make regarding the
following matters are forward-looking by their nature:
● our expectations regarding the expansion of our servable addressable market;
● our expectations regarding our future gross margins and operating expenses;
● our expectations regarding our growth and overall profitability;
● our expectations regarding the impacts of variability on our future revenues;
● our expectations regarding drivers of our future growth, including anticipated sales growth, penetration of new markets, and expansion of our
customer base;
● our plans to expand into continue our expansion into new product markets;
● our plans to continue to invest in research and development to introduce new systems and improved solutions;
● our expectations regarding the success of our new products and systems;
● the impact of government laws and regulations;
● our expectations regarding our anticipated cash requirements for the next 12 months;
● our plans to expand our international operations;
● our plans to file and procure additional patents relating to our intellectual property rights and the adequate protection of these rights;
● our plans to pursue strategic acquisitions or invest in complementary companies, products or technologies; and
● our expectations regarding the time during which we will be an emerging growth company under the JOBS Act.
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our
beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only
predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, levels of
activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by the
forward-looking statements. In particular, you should consider the risks described in “ITEM 3.D Risk Factors,” “ITEM 4 Information on the Company,” and
“ITEM 5 Operating and Financial Review and Prospects.”
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected
in the forward-looking statements will be achieved or will occur.
1
Table of Contents
USE OF TRADE NAMES
Throughout this annual report, we refer to various trademarks, service marks and trade names that we use in our business. The “Kornit Digital”
design logo, the “K” logo and other trademarks or service marks of Kornit Digital Ltd. appearing in this annual report are the property of Kornit Digital Ltd.
We have several other registered trademarks, service marks and pending applications relating to our solutions. Although we have omitted the “®” and “™”
trademark designations for such marks in this annual report, all rights to such trademarks are nevertheless reserved. Other trademarks and service marks
appearing in this annual report are the property of their respective holders. We do not intend our use or display of other companies’ tradenames, trademarks or
service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
In this annual report, unless the context otherwise requires:
CERTAIN ADDITIONAL TERMS AND CONVENTIONS
● references to “Kornit Digital,” “our company,” “the Company,” “the registrant,” “we,” “us,” and “our” refer to Kornit Digital Ltd.;
● references to “ordinary shares”, “our shares” and similar expressions refer to the Company’s Ordinary Shares, par value NIS 0.01 per share;
● references to “dollars”, “U.S. dollars”, “U.S. $” and “$” are to United States Dollars;
● references to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency;
● references to “GAAP” are to U.S. Generally Accepted Accounting Principles;
● references to our “articles” are to our Articles of Association, as amended;
● references to the “Companies Law” are to the Israeli Companies Law, 5759-1999, as amended;
● references to the “Securities Act” are to the U.S. Securities Act of 1933, as amended;
● references to the “Exchange Act” are to the U.S. Securities Exchange Act of 1934, as amended;
● references to “NASDAQ” are to the NASDAQ Stock Market; and
● references to the “SEC” are to the United States Securities and Exchange Commission.
2
Table of Contents
ITEM 1.
Identity of Directors, Senior Management and Advisers.
Not Applicable.
ITEM 2.
Offer Statistics and Expected Timetable.
PART I
Not Applicable.
ITEM 3.
Key Information.
A. Selected Financial Data
The following tables set forth our selected consolidated financial data. You should read the following selected consolidated financial data in
conjunction with, and it is qualified in its entirety by reference to, our historical financial information and other information provided in this annual report,
including “ITEM 5 - Operating and Financial Review and Prospects” and our consolidated financial statements and the related notes appearing elsewhere in
this annual report.
The selected consolidated statements of income data for the years ended December 31, 2015, 2016 and 2017 and selected consolidated balance sheet
data as of December 31, 2016 and 2017 are derived from our audited consolidated financial statements appearing in ITEM 18. Financial Statements. The
selected consolidated statements of income data for the year ended December 31, 2013 and 2014 and the selected consolidated balance sheet data as of
December 31, 2013, 2014 and 2015 has been derived from our audited consolidated financial statements not appearing in this annual report. The historical
results set forth below are not necessarily indicative of the results to be expected in future periods. Our financial statements have been prepared in accordance
with GAAP.
2013
Year Ended December 31,
2015
(in thousands, except share and per share data)
2016
2014
2017
Consolidated Statements of Income:
Revenues
Cost of revenues(1)
Gross profit
Operating expenses:
Research and development(1)
Sales and marketing(1)
General and administrative(1)
Restructuring expenses
Total operating expenses
Operating income (loss)
Finance income (expenses), net
Income (loss) before taxes on income
Taxes on income
Net income (loss)
Net earnings (loss) per ordinary share(2)
Basic
Diluted
Weighted average number of ordinary shares used in
computing income per ordinary share(2)
Basic
Diluted
$
$
$
$
49,395 $
27,953
21,442
7,443
7,734
3,278
-
18,455
2,987
(460)
2,527
1,393
1,134 $
0.13 $
0.11 $
66,364 $
37,187
29,177
9,475
10,616
5,266
-
25,357
3,820
(15)
3,805
782
3,023 $
0.34 $
0.29 $
86,405 $
45,820
40,585
11,950
13,367
9,500
-
34,817
5,768
(334)
5,434
709
4,725 $
0.19 $
0.18 $
108,694 $
59,284
49,410
114,088
59,977
54,111
17,383
18,338
12,259
-
47,980
1,430
46
1,476
648
828 $
0.03 $
0.03 $
20,834
21,279
13,578
503
56,194
(2,083)
452
(1,631)
384
(2,015)
(0.06)
(0.06)
8,953,565
9,880,049
8,969,588
10,446,329
24,633,369
26,458,584
30,562,255
31,732,532
33,574,147
33,574,147
3
Table of Contents
Consolidated balance sheet data:
Cash and cash equivalents
Working capital(3)
Total assets
Total long term liabilities
Total shareholders’ equity
(1) Includes share-based compensation expense as follows:
Share-based compensation expense:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total share-based compensation expense
2013
2014
As of December 31,
2015
(in thousands)
2016
2017
5,329 $
12,811
31,627
1,617
15,608
4,993 $
14,863
34,714
2,025
19,351
18,464 $
65,455
123,352
1,839
100,262
22,789 $
68,651
140,046
2,725
107,188
18,629
63,907
178,374
2,155
150,699
2013
2014
11 $
21
66
28
126 $
Year Ended December 31,
2015
(in thousands)
96 $
86
207
508
897 $
306 $
281
537
1,259
2,383 $
2016
2017
482 $
217
654
1,640
2,993 $
629
775
920
2,087
4,411
$
$
$
(2) Basic and diluted net earnings per ordinary share is computed based on the basic and diluted weighted average number of ordinary shares outstanding
during each period. For additional information, see notes 2z and 11 to our consolidated financial statements included in ITEM 18. Financial Statements.
(3) Working capital is defined as total current assets minus total current liabilities. In November 2015, the Financial Accounting Standards Board, or the
FASB, issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17),
which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities to be classified as noncurrent on the balance
sheet. We early adopted this standard in 2015 retrospectively and reclassified all of our current deferred tax assets to noncurrent deferred tax assets which
has resulted in a change to previously published working capital amounts for the years ended December 31, 2013 and 2014.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Our business involves a high degree of risk. Please carefully consider the risks we describe below in addition to the other information set forth in
this annual report and in our other filings with the SEC. These risks could materially and adversely affect our business, financial condition and results of
operations. See “Cautionary Note Regarding Forward-Looking Statements.”
4
Table of Contents
Risks Related to Our Business and Our Industry
If the market for digital textile printing does not develop as we anticipate, our sales may not grow as quickly as expected and our share price could
decline.
The global printed textile industry is currently dominated by analog printing processes, the most common of which are screen printing and carousel
printing. If the global printed textile industry does not more broadly accept digital printing as an alternative to analog printing, our revenues may not grow as
quickly as expected, or may decline, and our share price could suffer. Widespread adoption of digital textile printing depends on the willingness and ability of
businesses in the printed textile industry to replace their existing analog printing systems with digital printing systems. These businesses may decide that
digital printing processes are less reliable, less cost-effective, of lower quality, or otherwise less suitable for their commercial needs than analog printing
processes. For example, screen printing currently tends to be faster and less expensive than digital printing on a cost per print basis for larger production runs.
Even if businesses are persuaded as to the benefits of digital printing, we do not know whether potential buyers of digital printing systems will delay their
investment decisions. As a result, we may not correctly estimate demand for our solutions, which could cause us to fail to meet customer needs in a timely
manner or fail to take advantage of economies of scale in the production of our solutions.
If our customers use alternative ink and consumables and/or alternative spare parts in our systems, our gross margin could decline significantly, and our
business could be harmed.
Our business model benefits significantly from recurring sales of our ink and other consumables and spare parts for our existing and growing
installed base of systems. Third parties could try to sell, and purchasers of our systems can seek to buy, alternative versions of our ink and other consumables
or alternative spare parts. We have encountered limited instances of these activities by third parties in specific regions. Third-party ink and other consumables
and spare parts might be less expensive or otherwise more appealing to our customers than our ink and other consumables. Significant sales of third-party
inks and other consumables and spare parts to our customers could adversely impact our revenues and would have a more significant effect on our gross
margins and overall profitability.
Given the sensitivity of our systems and, in particular, print heads to lower quality ink, which may cause our print heads to clog or otherwise
malfunction, our systems are setup to operate at the highest throughput level only when using our original ink and other consumables in order to protect them
from damage. In addition, since we are unable to control the impact of third-party inks, their use and the use of third-party spare parts voids the warranty that
comes with our systems. We have also sought to protect the proprietary technology underlying our ink through patents and other forms of intellectual property
protections and include an RFID mechanism with our ink tanks. These steps that we have taken to ensure the smooth operation of our systems and our ability
to fully invoke all our intellectual property rights may be challenged. Any reduction in our ability to market and sell our ink and other consumables and spare
parts for use in our systems may adversely impact our future revenues and our overall profitability.
We face increased competition and if we do not compete successfully, our revenues and demand for our solutions could decline.
The principal competition for our digital printing systems comes from manufacturers of analog screen printing systems, textile printers and ink. Our
principal competitor in the high throughput digital direct-to -garment market is Aeoon Technologies GmbH. We also face competition in this market from
Brother International Corporation, Seiko Epson Corporation, Ricoh and a number of smaller competitors with respect to our entry level system. Our
competitors in the R2R market include: Dover Corporation through its MS Printing Solutions S.r.l. subsidiary, Durst Phototechnik AG; Electronics for
Imaging, Inc. through its Reggiani Macchine SpA subsidiary; Mimaki Engineering Co., Ltd.; and a number of smaller competitors. Some of our current and
potential competitors have larger overall installed bases, longer operating histories and greater name recognition than we have. In addition, many of these
competitors have greater sales and marketing resources, more advanced manufacturing operations, broader distribution channels and greater customer support
resources than we have. Some of our competitors in the R2R market have become increasingly interested in moving from rotary screen printing to digital
printing and have broadened their product offering by merging with or acquiring other companies in the R2R market. Current and future competitors may be
able to respond more quickly to changes in customer demands and devote greater resources to the development, promotion and sale of their printers and ink
and other consumables than we can. Our current and potential competitors in both the direct-to -garment and roll-to-roll markets may also develop and market
new technologies that render our existing solutions unmarketable or less competitive. In addition, if these competitors develop products with similar or
superior functionality to our solutions at prices comparable to or lower than ours, we may be forced to decrease the prices of our solutions in order to remain
competitive, which could reduce our gross margins.
5
Table of Contents
A significant portion of our sales is concentrated among one of our independent distributors and a small number of customers, and our business would
be adversely affected by a decline in sales to, or the loss of, this distributor or these customers.
Our primary distributor in the United States, Hirsch International Corporation, accounted for approximately 21% and 18% of our revenues in 2016
and 2017, respectively. We have entered into a non-exclusive distributor agreement with Hirsch with a term that ends in April 2018 subject to automatic
renewal for successive one-year periods unless one party notifies the other party that it does not wish to renew the agreement. Hirsch may fail to devote the
same level of attention to our solutions as it currently does, elect to distribute competitors’ products or be less successful than distributors of competitors’
products in their territories and, as a result, sales of our solutions may suffer. In addition, our relationship with Hirsch could be terminated with little or no
notice if Hirsch becomes subject to bankruptcy or other similar proceedings or otherwise becomes unable or unwilling to continue its business relationship
with us, and we may not be able to find a qualified and successful replacement in a timely manner. Additionally, a default by Hirsch at a time that it has a
significant receivables balance with us could harm our financial condition. For the year ended December 31, 2016 and 2017, Amazon Corporate LLC, a
subsidiary of Amazon.com, Inc., accounted for approximately 16% and 13% of our revenues, respectively. During 2017, we experienced delays in delivery of
systems to Amazon due to delays in obtaining certain regulatory permits for an Amazon site, which negatively affected our revenues and profitability. Our ten
largest customers accounted for approximately 55% of our revenues for the year ended December 31, 2017. The loss of either this distributor or customer, or
another one of our significant customers, or variability in their order flows could materially adversely affect our revenues. Due to the concentration of our
revenues with this distributor and customer, any such event could have a material adverse effect on our results of operations.
Our operating results are subject to seasonal variations, which could cause the price of our ordinary shares to decline.
Our business is seasonal. Either the third or fourth quarter has historically been our strongest quarter in terms of revenues and the first quarter has
been our weakest. This seasonality coincides with spending in anticipation of the holidays towards the end of the year, especially in the United States and
Europe. In the last three fiscal years, we have continuously increased our operating expenses throughout the year, and as such, the expense run rate at which
we have ended each year is significantly higher than where we started the given year. The carryover of such costs into the first quarter of the following year
results in downward pressure on operating margins, which is compounded by seasonally lower revenue in the first quarter compared to other quarters.
In addition, during the third and fourth quarter, when customer spending is at its highest levels, we enjoy a more favorable revenue mix, generating
greater revenues from the sales of ink and other consumables than in the first quarter. Since sales of ink and other consumables generate higher gross margins
than systems sales, gross margin in the third or fourth quarter tends to be higher than gross margin in the first quarter, when our customers typically reduce
their system utilization rates significantly, and thereby purchase less ink and other consumables. This impact leads to a reduction in overall operating margins.
As we continue to focus our sales efforts on larger accounts, and as we continue to invest in the growth of our business, the impact of this seasonal decline in
revenues generated from sales of ink and other consumables has had and may continue to have a more pronounced impact on gross margins and operating
margins.
6
Table of Contents
Our quarterly results of operations have fluctuated in the past and may fluctuate in the future due to variability in our revenues.
Our revenues and other results of operations have fluctuated from quarter to quarter in the past and could continue to fluctuate in the future. Our
revenues depend in part on the sale and delivery of our systems, and we cannot predict with certainty when sales transactions for our systems will close or
when we will be able to recognize the revenues from such sales, which generally occurs upon delivery of our systems. Customers that we expect to purchase
our systems may delay doing so due to timing of obtaining regulatory permits or a change in their priorities or business plans, including as a result of adverse
general economic conditions that may disproportionately impact the ability of the small businesses that constitute a significant portion of our customer base to
expend capital or access financing sources. Such conditions could also force us to reduce our prices or limit our ability to profit from economies of scale,
which could harm our gross margins. As a result of these factors, we may fail to meet market expectations for any given quarter if sales that we expect for that
quarter are delayed until subsequent quarters. Our Allegro and Vulcan systems are offered at a higher average selling price than our other systems and, as a
result, have longer sales cycles. The closing of one or more large transactions in a particular quarter may make it more difficult for us to meet market
expectations in subsequent quarters, and our failure to close one or more large transactions in a particular quarter could adversely impact our revenues for that
quarter. In addition, we may experience slower growth in our gross margins as our new systems gain commercial acceptance. Our gross margins may also
fluctuate based on the regions in which sales of these systems occur.
Our customers generally purchase our ink and other consumables on an as-needed basis, and delays in making such purchases by a number of
customers could result in a meaningful shift of revenues from one quarter to the next. Moreover, because ink and other consumables have a shelf life of up to
12 months, we typically maintain inventories of ink and other consumables sufficient to cover our average sales for one quarter. These inventories may not
match customers’ demands for any given quarter, which could cause shortages or excesses in our inventory of ink and other consumables and result in
fluctuations of our quarterly revenues. To the extent that we have excess inventory of ink and consumables that we are unable to sell due to spoilage or
otherwise, we may have to write off such inventory. These inventory requirements may also limit our ability to profit from economies of scale in the
production and marketing of our ink and other consumables.
Furthermore, we base our current and future expense levels on our revenue forecasts and operating plans, and our costs are relatively fixed in the
short term, due in part to long lead times required for ordering certain components of our systems and ordering assembly of our systems by third-party
manufacturers. Accordingly, we would likely not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues during a
particular quarter, and even a relatively small decrease in revenues could disproportionately and adversely affect our financial results for that quarter. The
variability and unpredictability of these and other factors could result in our failing to meet financial expectations for a given period.
Our contractual arrangements with Amazon, a significant customer, contain a number of material undertakings by us and other agreements the impact
of which cannot be fully predicted in advance.
In January 2017, we entered into a master purchase agreement with an affiliate of Amazon.com, Inc. governing sales of our systems and ink and
other consumables at agreed upon prices that vary based on sales volumes. We also agreed to provide maintenance services and extended warranties to
Amazon at agreed prices. The term of the agreement is five years beginning on May 1, 2016 and extends automatically for additional one year periods unless
terminated by Amazon. According to the agreement we were required to issue to an affiliate of Amazon warrants to purchase up to 2,932,176 of our ordinary
shares which vest based on payments made by Amazon in connection with the purchase of goods and services from us.
Our contractual agreements with Amazon contain a number of material undertakings and other arrangements:
● Our revenues are presented net of the relative value of the warrants in each particular period related to the revenues recognized. Since the value
of the warrants depends, in part, on the price of our shares and their volatility, our net revenues may fluctuate due to the non-cash impact of the
value of the warrant on our gross revenues.
● We have agreed to provide a rebate to Amazon based on the number of systems and amount of ink and other consumables Amazon orders in a
given 12 month period. The timing and scale of any such rebate may be difficult to predict, particularly in light of the fact that such 12 month
periods are not concurrent with our reporting periods, and may cause fluctuations in our quarterly and annual revenues, gross profit and
operating profit.
7
Table of Contents
● We are required to notify Amazon 12 months in advance if we intend to stop supporting one of the products or services that we supply to
Amazon and to continue to manufacture the product or provide such service during such 12-month period. Subject to certain exceptions, we are
required to continue to supply ink in such quantities as Amazon requires for at least 36 months after the earlier of (1) the end of the term of the
master purchase agreement or (2) 18 months following the purchase of the last product sold pursuant to the agreement.
● We are required to deliver our products and services to Amazon and to comply with a service level agreement. If we fail to meet the
requirements under such service level agreement Amazon will receive credits against its cost for those delayed products or services.
The impact of the provisions listed above cannot be fully predicted in advance and could, in certain circumstances, adversely impact our business or
results of operations.
If our relationships with suppliers, especially with single source suppliers of components, were to terminate, our business could be harmed.
We maintain an inventory of parts to facilitate the timely assembly of our systems, production of our ink and other consumables, and servicing our
installed base. Most components are available from multiple suppliers, although certain components used in our systems and ink and other consumables, such
as our print heads and certain chemicals included in our inks, are only available from single or limited sources as described below.
● The print heads for our systems are supplied by a sole supplier, FujiFilm Dimatix, Inc., or FDMX. We entered into an agreement with FDMX in
2015, pursuant to which FDMX is continuing to sell us certain off-the-shelf print heads and additional products, all of which FDMX regularly
sells to providers of inkjet systems. The agreement provides that beginning with the start of the first one-year renewal period, FDMX may
increase the prices of the products that we purchase from it upon 90-days’ prior notice, subject to certain conditions. The agreement renews
automatically for successive one-year periods, but FDMX or we can terminate the agreement upon 90 days’ notice prior to the end of the then
current term. Our current agreement terminates in December 2019 and provides for one three-year renewal period and for further one-year
renewal periods thereafter. Our agreement further provides that FDMX may, at its option, discontinue products supplied under the agreement,
provided that we are given one year notice of the planned discontinuance and are provided with an end of life purchase program.
● A chemical used in some of our inks is supplied by B.G. (Israel) Technologies Ltd., or BG Bond, a subsidiary of Ashtrom Ltd., a large public
Israeli industrial company. We entered into an agreement with BG Bond in December 2016 pursuant to which we agree to purchase and BG
Bond agrees to produce this chemical at set prices. In exchange for an upfront payment, which is refundable upon the purchase of the chemical,
BG Bond agreed to install additional equipment dedicated to the production of the chemical. The agreement is for a term of five years or until
we purchase a certain agreed upon minimum quantity and cannot be terminated by us other than in case of material breach by BG Bond. For
some of our inks, this chemical is supplied by The Dow Chemical Company, a multinational producer of chemicals and other compounds. We
currently purchase these chemicals from the Dow Chemical Company on a purchase order basis.
The loss of any of these suppliers, or of a supplier for which there are limited other sources, could result in the delay of the manufacture and delivery
of our systems or inks and other consumables. For instance, FDMX has from time to time indicated that it may discontinue manufacturing the print head that
we currently source from it and use in our systems, although it has never provided notice that it is actually doing so. In the event FDMX discontinues
manufacturing the print head, we would be required to qualify a new print head for our systems. In order to minimize the risk of any impact from a disruption
or discontinuation in the supply of print heads, raw materials or other components from limited source suppliers, we maintain an additional inventory of such
components, in addition to the end of life purchase program that would be available to us if the products we purchase from FDMX were discontinued.
Nevertheless, such inventory may not be sufficient to enable us to continue supplying our products should we need to locate and qualify a new supplier.
8
Table of Contents
Other risks stemming from our reliance on suppliers include:
● if we experience an increase in demand for our solutions, our suppliers may be unable to provide us with the components that we need in order
to meet that increased demand in a timely manner;
● our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders
and meet our requirements;
● we may experience production delays related to the evaluation and testing of products from alternative suppliers;
● we may be subject to price fluctuations due to a lack of long-term supply arrangements for key components;
● we or our suppliers may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment
of our systems or inks and other consumables; and
● fluctuations in demand for components that our suppliers manufacture for others may affect their ability or willingness to deliver components to
us in a timely manner.
If any of these risks materialize, the costs associated with developing alternative sources of supply or assembly in a timely manner could have a
material adverse effect on our ability to meet demand for our solutions. Our ability to generate revenues could be impaired, market acceptance of our
solutions could be adversely affected, and customers may instead purchase or use alternative products. We may not be able to find new or alternative
components of a requisite quality or find that we are unable to reconfigure our systems and manufacturing processes in a timely manner if the necessary
components become unavailable. As a result, we could incur increased production costs, experience delays in the delivery of our solutions and suffer harm to
our reputation, which may have an adverse effect on our business and results of operations.
Disruption of operations at our manufacturing site or those of third-party manufacturers could prevent us from filling customer orders on a timely basis.
We manufacture our ink and other consumables at our facility in Kiryat Gat, Israel. We also rely on contract manufacturing services provided by Flex
Israel Ltd. and ITS Industrial Techno Logic Solutions Ltd., which are also in Israel, to assemble our systems. We expect that almost all of our revenues in the
near term will be derived from the systems and ink and other consumables manufactured at these facilities and at the facilities of a new provider with which
we have an initial agreement and are currently negotiating a manufacturing services agreement.
The loss of any of these contract manufacturers could result in the delay of the assembly and delivery of our systems. If that occurs or these contract
manufacturers cease to provide manufacturing services for any reason, the costs associated with developing alternative sources of assembly in a timely
manner could have a material adverse effect on our ability to meet demand for our solutions. Our ability to generate revenues could be impaired, market
acceptance of our solutions could be adversely affected, and customers may instead purchase or use alternative products.
If operations in any of these facilities were to be disrupted due to a major equipment failure or power failure lasting beyond the capabilities of
backup generators or other events outside of our reasonable control, our manufacturing capacity could be shut down for an extended period, we could
experience a loss of raw materials or finished goods inventory and our ability to operate our business would be harmed. In addition, in any such event, the
repair or reconstruction of our or our third-party manufacturers’ manufacturing facilities and storage facilities could take a significant amount of time. During
this period, we or our third-party manufacturers would be unable to manufacture some or all of our systems or we may not be able to produce our ink and
other consumables. In addition, at any given moment we have only a limited inventory of our systems and ink and other consumables that we can supply to
our customers in the event that our manufacturing is disrupted.
9
Table of Contents
Systems we introduced during the past three years or that are in development may not achieve market acceptance or gain adequate market share and may
otherwise affect our results of operations.
Since 2015, we introduced several new systems to the market. We began selling our Allegro system commercially in the R2R market in the second
quarter of 2015. During 2016, we commercially launched a new DTG system, the Vulcan, which is a digital alternative for carousel screen printing within the
direct-to-garment segment. In January 2018, we launched new systems as part of our Avalanche line which incorporate certain advanced hardware, software
and consumables. We cannot ensure that the significant investments that we have made in distribution, sales and customer service teams to launch the new
systems will enable us to successfully market, sell and distribute the systems as planned. Market acceptance of the new systems will depend on, among other
things, the systems demonstrating a real advantage over existing printers, the success of our sales and marketing teams in creating awareness of the systems,
the sales price and the return on investment of the systems relative to alternative printers, customer recognition of the value of our technology, the
effectiveness of our marketing campaigns, and the general willingness of potential customers to try new technologies. In the event that we are unable to
achieve market acceptance of our new systems, our growth and future prospects may be adversely affected. If we are successful in selling our new systems
which provide greater efficiency and lower cost per print, sales of ink and other consumables per system may decrease, which may adversely affect our results
of operations, including gross margin and overall profitability,
Our operating results could decline further in the near-term if we fail to execute on our growth strategies.
Our operating margin was 1.3% in 2016 and we had an operating loss of 1.8% in 2017. Our growth strategies, many of which are aimed at achieving
operating and net profit margins, include increasing sales to existing customers, acquiring new high volume customers, capitalizing on growth in our targeted
markets and extending our serviceable addressable market by continuing to enhance our solutions. If we do not execute these strategies successfully, it could
adversely impact our revenues and have a negative impact on our operating and net profit margins.
Our business and operations may be negatively affected if we fail to effectively manage our growth.
We have experienced significant growth in a relatively short period of time and intend to continue to grow our business. Our revenues grew from
$66.4 million in 2014 to $114.1 million in 2017. Our headcount increased from 251 as of December 31, 2014 to 412 as of December 31, 2017. We plan to hire
additional employees across all areas of our company. Our rapid growth has placed significant demands on our management, sales and operational and
financial infrastructure, and our growth will continue to place significant demands on these resources. Further, in order to manage our future growth
effectively, we must continue to improve our IT and financial infrastructure, operating and administrative systems and controls and efficiently manage
headcount, capital and processes. We may not be able to successfully implement these improvements in a timely or efficient manner, and our failure to do so
may materially impact our projected growth rate.
Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.
A significant invasion, interruption, destruction or breakdown of our information technology, or IT, systems and/or infrastructure by persons with
authorized or unauthorized access could negatively impact our business and operations. We could also experience business interruption, information theft
and/or reputational damage from cyber attacks, which may compromise our systems and lead to data leakage either internally or at our third party suppliers.
Both data that has been inputted into our main IT platform, which covers records of transactions, financial data and other data reflected in our results of
operations, as well as data related to our proprietary rights (such as research and development, and other intellectual property- related data), are subject to
material cyber security risks. Our IT systems have been, and are expected to continue to be, the target of malware and other cyber attacks. To date, we are not
aware that we have experienced any loss of, or disruption to, material information as a result of any such malware or cyber attack.
We have invested in advanced protective systems to reduce these risks, some of which have been installed and others that are still in the process of
installation. Based on information provided to us by the suppliers of our protective systems, we believe that our level of protection is in keeping with the
customary practices of peer technology companies. We also maintain back-up files for much of our information, as a means of assuring that a breach or cyber
attack does not necessarily cause the loss of that information. We furthermore review our protections and remedial measures periodically in order to ensure
that they are adequate.
10
Table of Contents
Despite these protective systems and remedial measures, techniques used to obtain unauthorized access are constantly changing, are becoming
increasingly more sophisticated and often are not recognized until after an exploitation of information has occurred. We may be unable to anticipate these
techniques or implement sufficient preventative measures, and we therefore cannot assure you that our preventative measures will be successful in preventing
compromise and/or disruption of our information technology systems and related data. We furthermore cannot be certain that our remedial measures will fully
mitigate the adverse financial consequences of any cyber attack or incident.
We and our customers are subject to extensive environmental, health and safety laws and regulations which, if not met, could have a material adverse
effect on our business, financial condition and results of operations.
Our manufacturing and development facilities use chemicals and produce waste materials, which require us to hold business licenses that may
include conditions set by the Ministry of Environmental Protection for the operations of such facilities. We are also subject to extensive environmental, health
and safety laws and regulations governing, among other things, the use, storage, registration, handling and disposal of chemicals and waste materials, the
presence of specified substances in electrical products, air, water and ground contamination, air emissions and the cleanup of contaminated sites. In the future
we may incur expenditure of significant amounts in the event of non-compliance and/or remediation. Furthermore, requirements of environmental laws have
adversely affected and may continue to adversely affect the ability of our customers to install and use our systems in a timely manner. If we fail to comply
with such laws or regulations, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of our toxin permit,
business permits, or other permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil
judgments in respect of third-party claims, including those relating to personal injury, including exposure to hazardous substances that we use, store, handle,
transport, manufacture or dispose of, or property damage. Some environmental, health and safety laws and regulations allow for strict, joint and several
liability for remediation costs, regardless of comparative fault. We may be identified as a potentially responsible party under such laws. In addition, our
customers may encounter delays in obtaining or be unable to obtain regulatory permits to operate our systems in their facilities, which may result in
cancellation or delay of orders of our systems.
The export of our products internationally subjects us to environmental laws and regulations concerning the import and export of chemicals and
hazardous substances such as the United States Toxic Substances Control Act, or TSCA, and the Registration, Evaluation, Authorization and Restriction of
Chemical Substances, or REACH. These laws and regulations require the testing and registration of some chemicals that we ship along with, or that form a
part of, our systems and other products. If we fail to comply with these or similar laws and regulations, we may be required to make significant expenditures
to reformulate the chemicals that we use in our products and materials or incur costs to register such chemicals to gain and/or regain compliance.
Additionally, we could be subject to significant fines or other civil and criminal penalties should we not achieve such compliance.
Any of such developments could have a material adverse effect on our business, financial condition and results of operations. Environmental, health
and safety laws and regulations may also change from time to time. Complying with any new requirements may involve substantial costs and could cause
significant disruptions to our research, development, manufacturing, and sales.
11
Table of Contents
Exchange rate fluctuations between the U.S. dollar and the Israeli shekel, the Euro and other non-U.S. currencies may negatively affect our earnings.
The dollar is our functional and reporting currency. However, a significant portion of our operating expenses are incurred in Israeli shekels, or NIS.
As a result, we are exposed to the risk that the NIS may appreciate relative to the dollar, or, if the NIS instead devalues relative to the dollar, that the inflation
rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the
dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected. To protect against an
increase the dollar-denominated value of expenses paid in NIS during the year, we have instituted a foreign currency cash flow hedging program, which seeks
to hedge a portion of the economic exposure associated with our anticipated NIS-denominated expenses using derivative instruments. We expect that the
substantial majority of our revenues will continue to be denominated in U.S. dollars for the foreseeable future and that a significant portion of our expenses
will continue to be denominated in NIS. We cannot provide any assurances that our hedging activities will be successful in protecting us in full from adverse
impacts from currency exchange rate fluctuations since we only plan to hedge a portion of our foreign currency exposure, and we cannot predict any future
trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS against the dollar For example, based on annual average exchange rates,
the dollar appreciated 8.6% against the NIS in 2015, depreciated by 1.1% and 6.3% against the NIS in 2016 and 2017, respectively. During these periods,
there was deflation in Israel of 1.0% and 0.2% in 2015 and 2016, respectively, and inflation of 0.4% in 2017. If the dollar cost of our operations increases, our
dollar-measured results of operations will be adversely affected. See “ITEM 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign
Currency Risk.”
Our business could suffer if we are unable to attract and retain key employees.
Our success depends upon the continued service and performance of our senior management and other key personnel. Our senior executive team is
critical to the management of our business and operations, as well as to the development of our strategies. The loss of the services of any of these personnel
could delay or prevent the continued successful implementation of our growth strategy, or our commercialization of new applications for our systems and ink
and other consumables, or could otherwise affect our ability to manage our company effectively and to carry out our business plan. Members of our senior
management team may resign at any time. High demand exists for senior management and other key personnel in our industry. There can be no assurance that
we will be able to continue to retain such personnel.
Our growth and success also depend on our ability to attract and retain additional highly qualified scientific, technical, sales, managerial, operational,
HR, marketing and finance personnel. We compete to attract qualified personnel, and, in some jurisdictions in which we operate, the existence of non-
competition agreements between prospective employees and their former employers may prevent us from hiring those individuals or subject us to lawsuits
from their former employers. While we attempt to provide competitive compensation packages to attract and retain key personnel, some of our competitors
have greater resources and more experience than we have, making it difficult for us to compete successfully for key personnel. If we cannot attract and retain
sufficiently qualified technical employees for our research and development operations on acceptable terms, we may not be able to continue to competitively
develop and commercialize our solutions or new applications for our existing systems. Further, any failure to effectively integrate new personnel could
prevent us from successfully growing our company.
Under applicable employment laws, 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 generally enter into non-competition agreements with our employees. These agreements prohibit our employees, if they cease working for us,
from competing directly with us or working for our competitors or clients for a limited period. We may be unable to enforce these agreements under the laws
of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefiting from the expertise that our former
employees or consultants developed while working for us. For example, Israeli labor courts have required employers seeking to enforce non-compete
undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material
interests of the employer that have been recognized by the courts, such as the secrecy of a company’s trade secrets or other intellectual property.
12
Table of Contents
We have a significant presence in international markets and plan to continue to expand our international operations, which exposes us to a number of
risks that could affect our future growth.
We have a worldwide sales, marketing and support infrastructure that is comprised of independent distributors and value added resellers, and our
own personnel resulting in a sales, marketing and support presence in over 100 countries, including markets in North America, Western and Eastern Europe,
the Asia Pacific region and Latin America. We expect to continue to increase our sales headcount, our applications development headcount, our field support
headcount, our marketing headcount and our engineering headcount and, in some cases, establish new relationships with distributors, particularly in markets
where we currently do not have a sales or customer support presence. As we continue to expand our international sales and operations, we are subject to a
number of risks, including the following:
● greater difficulty in enforcing contracts and accounts receivable collection, as well as longer collection periods;
● increased expenses incurred in establishing and maintaining office space and equipment for our international operations;
● fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business;
● greater difficulty in recruiting local experienced personnel, and the costs and expenses associated with such activities;
● general economic and political conditions in these foreign markets;
● economic uncertainty around the world;
● management communication and integration problems resulting from cultural and geographic dispersion;
● risks associated with trade restrictions and foreign legal requirements, including the importation, certification, and localization of our solutions
required in foreign countries, such as high import taxes in Brazil and other Latin American markets where we sell our products;
● greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;
● the uncertainty of protection for intellectual property rights in some countries;
● greater risk of a failure of employees to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt
Practices Act (FCPA), and any trade regulations ensuring fair trade practices; and
● heightened risk of unfair or corrupt business practices in certain regions and of improper or fraudulent sales arrangements that may impact
financial results and result in restatements of, or irregularities in, financial statements.
Any of these risks could adversely affect our international operations, reduce our revenues from outside the United States or increase our operating
costs, adversely affecting our business, results of operations and financial condition and growth prospects. There can be no assurance that all of our
employees and channel partners will comply with the formal policies we have and will implement, or applicable laws and regulations. Violations of laws or
key control policies by our employees and channel partners could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or
the prohibition of the importation or exportation of our software and services and could have a material adverse effect on our business and results of
operations.
If we are unable to obtain patent protection for our solutions or otherwise protect our intellectual property rights, our business could suffer.
The success of our business depends on our ability to protect our proprietary technology, brand owners and other intellectual property and to enforce
our rights in that intellectual property. We attempt to protect our intellectual property under patent, trademark, copyright and trade secret laws, and through a
combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection.
13
Table of Contents
As of December 31, 2017, we owned fourteen (14) issued patents in the United States and twenty-two (22) provisional or pending U.S. patent
applications, along with twenty-seven (27) pending non-U.S. patent applications. We also had eleven (11) patents issued in non-U.S. jurisdictions, and ten
(10) pending Patent Cooperation Treaty patent applications, which are counterparts of our U.S. patent applications. The non-U.S. jurisdictions in which we
have issued patents or pending applications are China, the European Union or European countries of the European Union, Hong Kong, Israel, Canada,
Australia, Republic of Korea, South Africa, Vietnam, Philippines, Thailand, Brazil, El Salvador, Dominican Republic and India. We may file additional patent
applications in the future. The process of obtaining patent protection is expensive, time-consuming, and uncertain, and we may not be able to prosecute all
necessary or desirable patent applications at a reasonable cost or in a timely manner all the way through to the successful issuance of a patent. We may choose
not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Furthermore, it is possible that our
patent applications may not issue as granted patents, that the scope of our issued patents will be insufficient or not have the coverage originally sought, that
our issued patents will not provide us with any competitive advantages, and that our patents and other intellectual property rights may be challenged by others
through administrative processes or litigation resulting in patent claims being narrowed, invalidated, or unenforceable. In addition, issuance of a patent does
not guarantee that we have an absolute right to practice the patented invention. Our policy is to require our employees (and our consultants and service
providers, including third-party manufacturers of our systems and components, that develop intellectual property included in our systems) to execute written
agreements in which they assign to us their rights in potential inventions and other intellectual property created within the scope of their employment (or, with
respect to consultants and service providers, their engagement to develop such intellectual property), but we cannot assure you that we have adequately
protected our rights in every such agreement or that we have executed an agreement with every such party. Finally, in order to benefit from the protection of
patents and other intellectual property rights, we must monitor and detect infringement and pursue infringement claims in certain circumstances in relevant
jurisdictions, all of which are costly and time-consuming. As a result, we may not be able to obtain adequate protection or to effectively enforce our issued
patents or other intellectual property rights.
In addition to patents, we rely on trade secret rights, copyrights, trademarks, and other rights to protect our proprietary intellectual property and
technology. Despite our efforts to protect our proprietary intellectual property and technology, unauthorized parties, including our employees, consultants,
service providers or customers, may attempt to copy aspects of our solutions or obtain and use our trade secrets or other confidential information. We
generally enter into confidentiality agreements with our employees, consultants, service providers, vendors, channel partners and customers, and generally
limit access to and distribution of our proprietary information and proprietary technology through certain procedural safeguards. These agreements may not
effectively prevent unauthorized use or disclosure of our intellectual property or technology and may not provide an adequate remedy in the event of
unauthorized use or disclosure of our intellectual property or technology. We cannot assure you that the steps taken by us will prevent misappropriation of our
intellectual property or technology or infringement of our intellectual property rights. In addition, the laws of some foreign countries where we sell or
distribute our solutions do not protect intellectual property rights and technology to the same extent as the laws of the United States, and these countries may
not enforce these laws as diligently as government agencies and private parties in the United States. Based on the 2017 report on intellectual property rights
protection and enforcement published by the Office of the United States Trade Representative, such countries included Argentina, Chile, China, India,
Indonesia, Russia, Thailand and Ukraine (designated as priority watch list countries).
If we are unable to protect our trademarks from infringement, our business prospects may be harmed.
We own trademarks that identify “Kornit” “NeoPigment” and the “K” logo among others, and have registered these trademarks in certain key
markets. Although we take steps to monitor the possible infringement or misuse of our trademarks, third parties may violate our trademark rights. In addition,
we may not have trademark rights in all of the markets in which we may sell our products. Any unauthorized use of our trademarks could harm our reputation
or commercial interests. In addition, efforts to enforce our trademarks may be expensive and time-consuming, and may not effectively prevent infringement.
We may become subject to claims of intellectual property infringement by third parties or may be required to indemnify our distributors or other third
parties against such claims, which, regardless of their merit, could result in litigation, distract our management and materially adversely affect our
business, results of operations or financial condition.
We have in the past and may in the future become subject to third-party claims that assert that our solutions, services and intellectual property
infringe, misappropriate or otherwise violate third-party intellectual property or other proprietary rights.
14
Table of Contents
Intellectual property disputes can be costly and disruptive to our business operations by diverting the attention and energies of management and key
technical personnel, and by increasing our costs of doing business. Even if a claim is not directly against us, our agreements with distributors generally
require us to indemnify them against losses from claims that our products infringe third-party intellectual property rights and entitle us to assume the defense
of any claim as part of the indemnification undertaking. Our assumption of the defense of such a claim may result in similar costs, disruption and diversion of
management attention to that of a claim that is asserted directly against us. We may not prevail in any such dispute or litigation, and an adverse decision in
any legal action involving intellectual property rights could harm our intellectual property rights and the value of any related technology or limit our ability to
execute our business.
Adverse outcomes in intellectual property disputes could:
● require us to redesign our technology or force us to enter into costly settlement or license agreements on terms that are unfavorable to us;
● prevent us from manufacturing, importing, using, or selling some or all of our solutions;
● disrupt our operations or the markets in which we compete;
● impose costly damage awards;
● require us to indemnify our distributors and customers; and
● require us to pay royalties.
We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation
and adversely affect our business.
A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli
Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result of or arising from his or her employment with a
company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the
employee proprietary rights. The Patent Law also provides under Section 134 that if there is no agreement between an employer and an employee as to
whether the employee is entitled to consideration for service inventions, and to what extent and under which conditions, the Israeli Compensation and
Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine these issues. Section 135 of the Patent law provides criteria
for assisting the Committee in making its decisions. According to case law handed down by the Committee, an employee’s right to receive consideration for
service inventions is a personal right and is entirely separate from the proprietary rights in such invention. Therefore, this right must be explicitly waived by
the employee. A decision handed down in May 2014 by the Committee clarifies that the right to receive consideration under Section 134 can be waived and
that such waiver can be made orally, in writing or by behavior like any other contract. The Committee will examine, on a case by case basis, the general
contractual framework between the parties, using interpretation rules of the general Israeli contract laws. Further, the Committee has not yet determined one
specific formula for calculating this remuneration, nor the criteria or circumstances under which an employee’s waiver of his right to remuneration will be
disregarded. Similarly, it remains unclear whether waivers by employees in their employment agreements of the alleged right to receive consideration for
service inventions should be declared as void being a depriving provision in a standard contract. We generally enter into assignment-of-invention agreements
with our employees pursuant to which such individuals assign to us all rights to any inventions created in the scope of their employment or engagement with
us. Although our employees have agreed to assign to us service invention rights and have specifically waived their right to receive any special remuneration
for such service inventions beyond their regular salary and benefits, we may face claims demanding remuneration in consideration for assigned inventions.
15
Table of Contents
Undetected defects in the design or manufacturing of our products may harm our business and results of operations.
Our systems, ink and other consumables, and associated software may contain undetected errors or defects when first introduced or as new versions
are released. We have experienced these errors or defects in the past during the introduction of new systems and system upgrades. We expect that these errors
or defects will be found from time to time in new or enhanced systems after commencement of commercial distribution or upon software upgrades. These
problems may cause us to incur significant warranty and repair costs, divert the attention of our engineers from our product development and customer
service efforts and harm our reputation. We may experience a delay in revenue recognition or collection of due payments from relevant customers as a result
of our systems’ inability to meet agreed performance metrics. In addition, the use of third-party inks may harm the operation of our systems and reduce
customer satisfaction with them, which could harm our reputation and adversely affect sales of our systems. We may also be subject to liability claims for
damages related to system errors or defects. Although we carry insurance policies covering this type of liability, these policies may not provide sufficient
protection should a claim be asserted against us. Any product liability claim brought against us could force us to incur significant expenses, divert
management time and attention, and harm our reputation and business. In addition, costs or payments made in connection with warranty and product liability
claims and system recalls could materially affect our financial condition and results of operations.
We may need substantial additional capital in the future, which may cause dilution to our existing shareholders, restrict our operations or require us to
relinquish rights to our pipeline products or intellectual property. If additional capital is not available, we may have to delay, reduce or cease operations.
Based on our current business plan, we believe our cash flows from operating activities and our existing cash resources will be sufficient to meet our
currently anticipated cash requirements through the next 12 months without drawing on our lines of credit or using significant amounts of the net proceeds
from our initial public offering and follow-on offering. Nevertheless, to the extent our anticipated cash requirements change, we may seek additional funding
in the future. This funding may consist of equity offerings, debt financings or any other means to expand our sales and marketing capabilities, develop our
future solutions or pursue other general corporate purposes. Securing additional financing may divert our management from our day-to-day activities, which
may adversely affect our ability to market our current solutions and develop and sell future solutions. Additional funding may not be available to us on
acceptable terms, or at all.
To the extent that we raise additional capital through, for example, the sale of equity or convertible debt securities, your ownership interest will be
diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. The incurrence of indebtedness or the
issuance of certain equity securities could result in increased fixed payment obligations and could also result in certain restrictive covenants, such as
limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions
that could adversely impact our ability to conduct our business. In addition, the issuance of additional equity securities by us, or the possibility of such
issuance, may cause the market price of our ordinary shares to decline.
We have acquired businesses and may acquire other businesses and/or companies, which could require significant management attention, disrupt our
business, dilute shareholder value, and adversely affect our results of operations.
As part of our business strategy and in order to remain competitive, we have acquired businesses and may acquire or make investments in other
complementary companies, products or technologies. However, we have only made small acquisitions and our experience in acquiring and integrating other
companies, products or technologies is limited. We may not be able to find suitable acquisition candidates, and we may not be able to complete such
acquisitions on favorable terms, if at all. If we complete other acquisitions, we may not ultimately strengthen our competitive position or achieve our goals,
and any acquisitions we complete could be viewed negatively by our customers, analysts and investors. In addition, if we are unsuccessful at integrating such
acquisitions or the technologies associated with such acquisitions, our revenues and results of operations may be adversely affected. Any integration process
may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the
acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay
cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our
ordinary shares. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our shareholders. The incurrence of
indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our
operations.
16
Table of Contents
Risks Related to Our Ordinary Shares
Our share price may be volatile.
Our ordinary shares were first offered publicly in our initial public offering in April 2015 at a price of $10.00 per share, and our ordinary shares have
subsequently traded as high as $22.40 and as low as $8.10 through March 15, 2018. The market price of our ordinary shares could be highly volatile and may
fluctuate substantially as a result of many factors, including:
● actual or anticipated variations in our and/or our competitors’ results of operations and financial condition;
● variance in our financial performance from the expectations of market analysts;
● announcements by us or our competitors of significant business developments, changes in service provider relationships, acquisitions, strategic
relationships or expansion plans;
● changes in the prices of our solutions;
● our involvement in litigation;
● our sale of ordinary shares or other securities in the future;
● market conditions in our industry;
● changes in key personnel;
● the trading volume of our ordinary shares;
● changes in the estimation of the future size and growth rate of our markets; and
● general economic and market conditions;
In addition, the stock markets have experienced extreme price and volume fluctuations. Broad market and industry factors may materially harm the
market price of our ordinary shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation we could incur
substantial costs and our management’s attention and resources could be diverted. Furthermore, share price volatility may impact the fair value of the
warrants granted to Amazon and as a result may impact revenues and profits.
Fortissimo Capital has a significant influence over matters requiring shareholder approval, which could delay or prevent a change of control.
As of February 28, 2018, Fortissimo Capital beneficially owns approximately 13.3% of our ordinary shares and three of its principals are members
of our board of directors.
As a result, this shareholder could exert significant influence over our operations and business strategy with respect to matters such as:
● approving or rejecting a merger, consolidation or other business combination;
● raising future capital; and
● amending our articles, which govern the rights attached to our ordinary shares.
17
Table of Contents
We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid cash dividends on our share capital, nor do we anticipate paying any cash dividends on our share capital in the
foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result,
capital appreciation, if any, of our ordinary shares will be investors’ sole source of gain for the foreseeable future. In addition, Israeli law limits our ability to
declare and pay dividends, and may subject our dividends to Israeli withholding taxes. Furthermore, our payment of dividends (out of tax-exempt income)
may retroactively subject us to certain Israeli corporate income taxes, to which we would not otherwise be subject.
As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we may follow certain home country corporate governance
practices instead of otherwise applicable SEC and NASDAQ requirements, which may result in less protection than is accorded to investors under rules
applicable to domestic U.S. issuers.
As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country
corporate governance practices instead of those otherwise required under the corporate governance standards for U.S. domestic issuers. We currently follow
Israeli home country practices with regard to the (i) quorum requirement for shareholder meetings, (ii) independent director oversight requirement for director
nominations and (iii) independence requirement for the board of directors. See “ITEM 16G. Corporate Governance.” Furthermore, we may in the future elect
to follow Israeli home country practices with regard to other matters such as separate executive sessions of independent directors or to obtain shareholder
approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances 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). Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ
corporate governance rules. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States
company listed on NASDAQ may provide less protection than is accorded to investors of domestic issuers. See “ITEM 16G. Corporate Governance.”
As a foreign private issuer, we are not subject to the provisions of Regulation FD or U.S. proxy rules and are exempt from filing certain Exchange Act
reports.
As a foreign private issuer, we are exempt from a number of requirements under U.S. securities laws that apply to public companies that are not
foreign private issuers. In particular, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy
statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in
Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual and current reports and financial statements with the
SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act and we are generally exempt from
filing quarterly reports with the SEC under the Exchange Act. We are also exempt from the provisions of Regulation FD, which prohibits issuers from making
selective disclosure of material nonpublic information to, among others, broker-dealers and holders of a company’s securities under circumstances in which it
is reasonably foreseeable that the holder will trade in the company’s securities on the basis of the information. These exemptions and leniencies will reduce
the frequency and scope of information and protections to which you are entitled as an investor.
We are not required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement applicable to emerging growth
companies to disclose the compensation of our Chief Executive Officer and other two most highly compensated executive officers on an individual, rather
than on an aggregate, basis. Nevertheless, the Companies Law requires us to disclose in the notice of convening an annual general meeting the annual
compensation of our five most highly compensated office holders on an individual basis, rather than on an aggregate basis, as was previously permitted for
Israeli public companies listed overseas. This disclosure is not as extensive as that required of a U.S. domestic issuer.
18
Table of Contents
We would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet
additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions,
our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a
U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements
on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be
required to follow U.S. proxy disclosure requirements, including the requirement to disclose more detailed information about the compensation of our senior
executive officers on an individual basis. We may also be required to modify certain of our policies to comply with good governance practices associated with
U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we would lose our ability to rely upon exemptions from
certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our ordinary
shares less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 effective on April 5, 2012, or the JOBS Act,
and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not emerging growth
companies. Most of such requirements relate to disclosures that we would only be required to make if we cease to be a foreign private issuer in the future.
Nevertheless, as a foreign private issuer that is an emerging growth company, we are not required to comply with the auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act for up to five fiscal years after April 2, 2015, the date of our initial public offering. We will remain an emerging
growth company until the earliest of: (a) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion; (b) the last
day of our fiscal year following the fifth anniversary of the completion of our initial public offering; (c) the date on which we have, during the previous three-
year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the
Exchange Act. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act
discussed above. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on exemptions under the JOBS Act. If
some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be
more volatile.
The market price of our ordinary shares could be negatively affected by future sales of our ordinary shares.
Future sales by us or our shareholders of a substantial number of ordinary shares in the public market, or the perception that these sales might occur,
could cause the market price of our ordinary shares to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using,
our equity securities. Shares held by our pre-IPO shareholders are now eligible for sale under Rule 144 of the Securities Act, which could cause additional
downward pressure on the market price of our ordinary shares.
Fortissimo Capital is entitled to require that we conduct underwritten offerings under the U.S. Securities Act of 1933 with respect to the resale of its
shares into the public markets. In addition, Amazon is also entitled to certain registration rights starting on January 10, 2018. All shares sold pursuant to an
offering covered by a registration statement will be freely transferable except if purchased by an affiliate. See “ITEM 7.B — Related Party Transactions —
Investors’ Rights Agreement.” and “ITEM 10.C – Material Contracts – Agreements with Amazon.”
As of December 31, 2017, options to purchase 887,913 ordinary shares granted to employees and office holders were vested and exercisable and no
RSUs were vested. We have filed registration statements on Form S-8 under the Securities Act registering ordinary shares that we may issue under our share
incentive plans, of which as of December 31, 2017 there were options to purchase 2,360,647 shares and 88,759 RSUs outstanding. Shares included in such
registration statements may be freely sold in the public market upon issuance, except for shares held by affiliates who have certain restrictions on their ability
to sell.
19
Table of Contents
Under Section 404 of the Sarbanes-Oxley Act and as an emerging growth company, we are currently not required to obtain an auditor attestation
regarding our internal control over financial reporting.
We are required to comply with the evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act with respect to internal
control over financial reporting as of this annual report. Once we no longer qualify as an “emerging growth company” under the JOBS Act and lose the ability
to rely on the exemptions related thereto discussed above, our independent registered public accounting firm will need to attest to the effectiveness of our
internal control over financial reporting under Section 404. To maintain the effectiveness of our disclosure controls and procedures and our internal control
over financial reporting, we may need to continue enhancing existing, and implement new, financial reporting and management systems, procedures and
controls to manage our business effectively and support our growth in the future. Irrespective of compliance with Section 404, any failure of our internal
controls could have a material adverse effect on our stated results of operations and harm our reputation. If any such failure were to occur, we may be required
to take remedial actions and make required changes to our internal control over financial reporting and we may experience higher than anticipated operating
expenses, as well as higher independent auditor fees during and after the implementation of these changes. If we are unable to implement any of the required
changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our
operations, financial reporting and/or results of operations and could result in an adverse opinion on internal controls from our independent auditors.
Our U.S. shareholders may suffer adverse tax consequences if we are classified as a passive foreign investment company.
Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets
(which may be determined in part by the market value of our ordinary shares, which is subject to change) are held for the production of, or produce, passive
income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Based on historic and certain
estimates of our gross income, gross assets and market capitalization (which may fluctuate from time to time) and the nature of our business, we believe we
were not a PFIC for the taxable year ending 2017 and we do not expect that we will be classified as a PFIC for the taxable year ending December 31, 2018.
Because PFIC status is based on our income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized
as a PFIC for our 2018 taxable year until after the close of the year. There can be no assurance that we will not be considered a PFIC for any taxable year. If
we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares
treated as ordinary income, rather than as capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals
who are U.S. Holders (as defined in “ITEM 10.E Taxation and Government Programs—U.S. Federal Income Taxation”), and having interest charges apply to
distributions by us and the proceeds of sales of our ordinary shares. Certain elections exist that may alleviate some of the adverse consequences of PFIC status
and would result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares. For a more detailed discussion, see “ITEM 10.E
Taxation and Government Programs—U.S. Federal Income Taxation—Passive Foreign Investment Company Considerations.”
The ongoing effects of the Tax Act and the refinement of provisional estimates could make our results difficult to predict.
Our effective tax rate may fluctuate in the future as a result of the recent United States tax law changes pursuant to H.R. 1, originally known as the
2017 Tax Cuts and Jobs Act, or the Tax Act, which was enacted on December 22, 2017. The Tax Act introduces significant changes to U.S. income tax law
that will have a meaningful impact on our provision for income taxes. Accounting for the income tax effects of the Tax Act requires significant judgments and
estimates in the interpretation and calculations of the provisions of the Tax Act.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the
effects and recorded provisional amounts in our financial statements for the year ended December 31, 2017. The U.S. Treasury Department, the Internal
Revenue Service (IRS), and other standard-setting bodies may issue guidance on how the provisions of the Tax Act will be applied or otherwise administered
that is different from our interpretation. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the IRS or
other standard-setting bodies, we may make adjustments to the provisional amounts that could materially affect our financial position and results of
operations as well as our effective tax rate in the period.
Certain U.S. holders of our common shares may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized as a
“controlled foreign corporation”, or a CFC, under Section 957(a) of the Internal Revenue Code of 1986, as amended, or the Code.
A non-U.S. corporation is considered a CFC if more than 50 percent of (1) the total combined voting power of all classes of stock of such
corporation entitled to vote, or (2) the total value of the stock of such corporation, is owned, or is considered as owned by applying certain constructive
ownership rules, by United States shareholders who own stock representing 10% or more of the vote or, for the taxable year of a non-U.S. corporation
beginning after December 31, 2017 and for taxable years of shareholders with or within which such taxable years of such non-U.S. corporation ends, 10% or
more of the value on any day during the taxable year of such non-U.S. corporation (“10% U.S. Shareholder”). Generally, 10% U.S. Shareholders of a CFC are
required to include currently in gross income such 10% U.S. Shareholder’s share of the CFC’s “Subpart F income”, a portion of the CFC’s earnings to the
extent the CFC holds certain U.S. property, and certain other new items under the Tax Act. Such 10% U.S. Shareholders are subject to current U.S. federal
income tax with respect to such items, even if the CFC has not made an actual distribution to such shareholders. “Subpart F income” includes, among other
things, certain passive income (such as income from dividends, interests, royalties, rents and annuities or gain from the sale of property that produces such
types of income) and certain sales and services income arising in connection with transactions between the CFC and a person related to the CFC.
20
Table of Contents
Certain changes to the CFC constructive ownership rules introduced by the Tax Act may cause one or more of our non-U.S.
subsidiaries to be treated as CFCs, may also impact our CFC status and, thus, may affect holders of our common shares that are
United States shareholders. For 10% U.S. Shareholders, this may result in negative U.S. federal income tax consequences, such as
current U.S. taxation of Subpart F income and of any such shareholder’s share of our accumulated non-U.S. earnings and profits
(regardless of whether we make any distributions), taxation of amounts treated as global intangible low-taxed income under Section
951A of the Code with respect to such shareholder, and being subject to certain reporting requirements with the U.S. Internal
Revenue Service. Any 10% U.S. Shareholder should consult its own tax advisors regarding the U.S. tax consequences of acquiring,
owning, or disposing our common shares and the impact of the Tax Act, especially the changes to the rules relating to CFCs.
Risks Related to Our Operations in Israel
Our headquarters, manufacturing and other significant operations are located in Israel and, therefore, our results may be adversely affected by political,
economic and military instability in Israel.
Our headquarters, research and development and manufacturing facility, and the primary manufacturing facilities of our third-party manufacturers,
are located in Israel. In addition, the majority of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and
military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its neighboring countries. In recent years, these have included hostilities between Israel and Hezbollah in Lebanon and Hamas in the
Gaza Strip, both of which resulted in rockets being fired into Israel, causing casualties and disruption of economic activities. In addition, Israel faces threats
from more distant neighbors, in particular, Iran. Our commercial insurance does not cover losses that may occur as a result of an event associated with the
security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are
caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to
compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business. While we have
commenced implementation of a business continuity plan which provides for alternative sites outside of Israel, there can be no assurance that such plan will
be successful. Any armed conflict involving Israel could adversely affect our operations and results of operations.
Further, our operations could be disrupted by the obligations of personnel to perform military service. As of December 31, 2017, we had 267
employees based in Israel, certain of whom may be called upon to perform up to 54 days in each three year period (and in the case of non-officer commanders
or officers, up to 70 or 84 days, respectively, in each three year period) of military reserve duty until they reach the age of 40 (and in some cases, depending
on their specific military profession up to 45 or even 49 years of age) and, in certain emergency circumstances, may be called to immediate and unlimited
active duty. Our operations could be disrupted by the absence of a significant number of employees related to military service, which could materially
adversely affect our business and results of operations.
Several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose
restrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. In addition, there have been
increased efforts by activists to cause companies and consumers to boycott Israeli goods based on Israeli government policies. Such actions, particularly if
they become more widespread, may adversely impact our ability to sell our solutions.
In addition, the shipping and delivery of our systems and ink and other consumables from our manufacturing facilities and those of our third-party
manufacturers in Israel could be delayed or interrupted by political, economic, military, and other events outside of our reasonable control, including labor
strikes at ports in Israel or at ports of destination, military attacks on transportation facilities or vessels, and severe weather events. If delivery and installation
of our products is delayed or prevented by any such events, our revenues could be materially and adversely impacted.
21
Table of Contents
The government tax benefits that we currently receive require us to meet several conditions and may be terminated or reduced in the future, which would
increase our costs.
We and our wholly-owned Israeli subsidiary, Kornit Digital Technologies Ltd., or Kornit Technologies, are entitled to various tax benefits under the
Israeli Law for the Encouragement of Capital Investments, 1959, or the Investment Law. As a result of this status, we expect to have a reduced tax rate for our
taxable income generated in Israel in 2018. However, if we do not meet the requirements for maintaining these benefits, the tax benefits may be reduced or
cancelled and the relevant operations would be subject to Israeli corporate tax at the standard rate, which was 26.5% in 2015, 25% in 2016, 24% for 2017 and
is currently set for 23% for 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, as adjusted by the Israeli consumer price index, plus interest and penalties thereon. Even if we continue to meet the relevant
requirements, the tax benefits that our current beneficiary enterprises receive may not be continued in the future at their current levels or at all. If these tax
benefits would be 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, via acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs. See “ITEM 5. Operating and Financial
Review and Prospects - Taxation and Israeli Government Programs Applicable to our Company — Law for the Encouragement of Capital Investments, 5719-
1959.”
We received Israeli government grants for certain research and development activities. The terms of those grants restrict our ability to transfer
manufacturing operations or technology outside of Israel.
Our research and development efforts were financed in part through grants from the Israeli National Authority for Technological Innovation, or the
Innovation Authority (previously known as the Israeli Office of the Chief Scientist), which we repaid in full in 2015. Even though we have fully repaid our
Innovation Authority grants, we must nevertheless continue to comply with the requirements of the Encouragement of Research, Development and
Technological Innovation in the Industry Law, 5744-1984 (formerly known as the Law for the Encouragement of Research and Development in Industry
5744-1984), and related regulations, or collectively, the Innovation Law.
When a company develops know-how, technology or products and related services using grants provided by the Innovation Authority, the terms of
these grants and the Innovation Law, among others, restrict the transfer outside of Israel of such Innovation Authority-supported know-how (including by a
way of license for research and development purposes), the transfer inside Israel of such know-how and the transfer of manufacturing or manufacturing rights
of such products, and technologies outside of Israel, without the prior approval of the Innovation Authority. We may not receive those approvals.
Although we have repaid our grants in full, we remain subject to the restrictions set forth under the Innovation Law, including:
● Transfer of know-how outside of Israel. Transfer of the know-how that was developed with the funding of the Innovation Authority outside of
Israel requires prior approval of the Innovation Authority, and, if approved will require, the payment of a redemption fee, which cannot exceed
600% of the grant amount plus interest. Upon payment of such fee, the know-how and the production rights for the products supported by such
funding cease to be subject to the Innovation Law.
● Local manufacturing obligation. The terms of the grants under the Innovation Law require that the manufacturing of products resulting from
the Innovation Authority funded programs are carried out in Israel, unless a prior written approval of the Innovation Authority is obtained. Such
approval may be given in special circumstances and upon the fulfillment of certain conditions set forth in the Innovation Law, including
payment of increased royalties. Such approval is not required for the transfer of less than 10% of the manufacturing capacity in the aggregate,
and in such event, a notice to the Innovation Authority is required.
● Certain reporting obligations. A recipient of a grant or a benefit under the Innovation Law is required to notify the Innovation Authority of
events enumerated in the Innovation Law.
These restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer
manufacturing activities with respect to any product or technology outside of Israel; however, they do not restrict the export of our products that incorporate
know how funded by the Innovation Authority. Furthermore, the consideration available to our shareholders in a sale transaction involving the actual transfer
outside of Israel of technology or know-how developed with funding by the Innovation Authority pursuant to a merger or similar transaction may be reduced
by any amounts that we are required to pay to the Innovation Authority. Failure to comply with the requirements under the Innovation Law may subject us to
mandatory repayment of grants received by us, together with interest and penalties, as well as expose us to criminal proceedings.
22
Table of Contents
Provisions of Israeli law and our articles may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, even when the terms
of such a transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for
transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For
example, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the
holders of at least 95% of the issued share capital, otherwise, the acquirer may not own more than 90% of a company’s issued and outstanding share capital.
Completion of the tender offer also requires approval of a majority in number of the offerees that do not have a personal interest in the tender offer, unless at
least 98% of the company’s outstanding shares are tendered. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer
(unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek appraisal rights), may, at any time within six months
following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition. See “ITEM 10.B — Articles of Association
— Acquisitions under Israeli Law.”
Our articles provide that our directors (other than external directors) are elected on a staggered basis, such that a potential acquirer cannot readily
replace our entire board of directors at a single annual general shareholder meeting.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not
have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the
same extent as U.S. tax law. With respect to mergers involving an exchange of shares, Israeli tax law allows for tax deferral in certain circumstances but
makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the
transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain
share swap transactions in which the sellers receive shares in the acquiring entity that are publicly traded on a stock exchange, the tax deferral is limited in
time, and when such time expires, the tax becomes payable even if no disposition of such shares has occurred. In order to benefit from the tax deferral, a pre-
ruling from the Israel Tax Authority might be required.
It may be difficult to enforce a judgment of a U.S. court against us or our officers and directors, to assert U.S. securities laws claims in Israel or to serve
process on our officers and directors.
We are incorporated in Israel. The majority of our directors and executive officers reside outside of the United States, and most of our assets and
most of the assets of these persons are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons, including a
judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an
Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original
actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most
appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law
is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be
a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses
the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages
awarded by either a U.S. or foreign court. It may be difficult to enforce a judgment of a U.S. court against us, our officers and directors or the Israeli experts
named in this prospectus supplement in Israel or the United States, to assert U.S. securities laws claims in Israel or to serve process on our officers and
directors and these experts.
Your rights and responsibilities as a shareholder are governed by Israeli law, which differs in some material respects from the rights and responsibilities
of shareholders of U.S. companies.
The rights and responsibilities of the holders of our ordinary shares are governed by our articles and by Israeli law. These rights and responsibilities
differ in some material respects from the rights and responsibilities of shareholders in U.S.-based corporations. In particular, a shareholder of an Israeli
company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other
shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters
such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party
transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a shareholder
vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. 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.
23
Table of Contents
ITEM 4.
Information on the Company.
A. History and Development of the Company
Our History
Our legal name is Kornit Digital Ltd. and we were incorporated under the laws of the State of Israel on January 16, 2002.
In April 2015, we completed our initial public offering, or IPO, pursuant to which we sold 8.165 million ordinary shares for aggregate gross proceeds
(before underwriting discounts, commissions and expenses) of $81.65 million. Our ordinary shares began trading on the NASDAQ Global Select Market,
under the symbol “KRNT,” on April 2, 2015. On January 31, 2017, we completed a follow-on offering pursuant to which we sold 2.3 million ordinary shares
for aggregate gross proceeds (before underwriting discounts, commissions and expenses) of $38.0 million.
We are subject to the provisions of the Israeli Companies Law, 5759-1999. Our principal executive offices are located at 12 Ha’Amal Street, Rosh
Ha’Ayin 4809246, Israel, and our telephone number is +972-3-908-5800. Our website address is www.kornit.com (the information contained therein or linked
thereto shall not be considered incorporated by reference in this annual report). Our agent for service of process in the United States is Kornit Digital North
America Inc., located at 10541-10601 North Commerce Street, Mequon, Wisconsin 53092, and its telephone number is (262) 518-0200.
Principal Capital Expenditures
Capital expenditures for purchase of property, plant and equipment and the digital direct to garment printing assets of SPSI Inc., were $2.9 million
and $14.7 million in the years ended December 31, 2015 and 2016, respectively. Capital expenditures in the year ended December 31, 2017 included $5.7
million in property, plant and equipment. Our current capital expenditures relate primarily to investment in our new headquarters in the United States and in
our manufacturing facility for our ink and other consumables in Kiryat Gat, Israel. We plan on financing these capital expenditures from cash on hand.
B. Business Overview
Overview
Industry
The global textile and garment industry, including textile, clothing, footwear and luxury fashion, was nearly $3 trillion in 2015 and is projected to
grow between 2% and 5% annually through 2020, according to a 2016 Digital Textile Printing Industry Forecast 2015-2020 report by InfoTrends, a provider
of market intelligence on the digital imaging industry. The global printed textile industry represents a sub-segment of the global textile industry. The global
printed textile industry involves printing on fabric rolls, finished garments and unsewn pieces of cut fabric at various stages along the value chain in the
production of goods for the apparel and accessories, household, technical and display end markets.
There is a diverse ecosystem of businesses that utilize textile printing processes, such as custom decorators, online businesses, brand owners and
contract printers. Custom decorators of varying sizes use their own manufacturing facilities to print promotional, sports, educational and souvenir products. In
recent years the global retail market for apparel has transitioned to an online business model while brick and mortar “physical” stores have been constantly
shutting down around the world. This trend, dubbed by many is a “retail meltdown” has led Credit Suisse to estimate that up to 25% of US shopping malls
will be shut down by 2022. There is also an abundance of online businesses which use textile printing in a “produce to order” business model through online
platforms that facilitate the rapid printing and shipping of customized and personalized goods to consumers. Brand owners typically use contract printers for
textile production and printing and are increasingly aware of the benefits of various printing processes, which influences their choice of contract printer.
24
Table of Contents
We believe that the vast majority of the output of the global printed textile industry in 2016, which was projected to be approximately 32 to 33
billion square meters, was produced using analog print methods, specifically screen printing, carousels for printing on garments and rotary screen printers for
printing on rolls of fabric. Our assessment is based on data provided in a 2016 report by Smithers Pira, a provider of market intelligence on the printed textile
industry. The Pira report provides digital printing output estimates for 2016 and projects the analog printing output for 2016 as well as the annual digital
textile printing growth rate through 2021, which we used to calculate a projected digital output of approximately 870 million square meters for 2016,
representing 2.9% of total projected annual global printed textile output in 2016. According to the Pira report, initial growth rates in the digital textile printing
market were more than 45% between 2004 and 2009, declining to an average CAGR of 25% between 2009 and 2012, an average CAGR of 18.8% between
2012 and 2014 and an average CAGR of 15.6% for 2014 to 2016 as the market became more mature and, in part, due to the impact of the global economic
slowdown. Digital textile printing output is forecasted to grow at a 17.5% CAGR globally from 2016 to 2021 driven by projected CAGR over the same
period of approximately 16.5% in North America, 15.0% in Western Europe, 13.5% in Eastern Europe and 20.1% in Asia according to the Pira report. Within
digital textile printing, clothing applications represent the greatest amount of digital printed textile output and are projected to grow at a faster rate than
household, technical and display applications.
We estimate that global revenue from digital textile printing equipment and ink will grow at a 15.7% CAGR between 2016 and 2021 based on the
estimate of such revenue for 2016 and the projection for 2021, in each case, contained in the Pira report. There is currently a global installed base of
approximately 42,000 digital textile printers.
Trends Impacting Digital Textile Printing
Evolving consumer behavior is driving the growth in digital printing as well as the shift to online retail. This behavior is motivated by increased
demand for variety and complexity of images and designs as well as increased desire for customization and personalization. In order to distinguish themselves
from the masses, consumers demand, and brand owners seek to supply, a wide range of styles that are innovative and diverse.
Apparel represents the largest segment of the online retail market and sales are highly influenced by rapidly changing consumer trends. We believe
that several key trends are currently driving growth in both the online retail market and the demand for digital printing solutions:
● Immediate Gratification. According to a 2017 report by Consumer Intelligence Research Partners, the number of Amazon customers in the
United States willing to pay more in order to receive products faster, through its Amazon Prime service, stood at 90 million as of September
2017. This change in consumer behavior is causing retailers to evaluate ways to alter their approach towards inventory management in order to
retain the business of discrete shoppers. In addition to retooling their internal fulfillment capabilities, many retail brands have begun to leverage
the capacity of third party online stores in order to meet customer demands for delivery speed and product quality. We believe that the industry
will see an increase in proximity decoration, whereby traditional retailers will use more localized digital printing capacity in order to satisfy
consumer demands.
● Personal Expression. We believe consumers are increasingly seeking the ability to customize products by choosing preferred features from a
menu of options, or the ability to personalize products by adding an individualized pattern. We believe this trend is driving a shift to digital
printing and online retail in both our DTG and R2R end markets. While in the past personalization was primarily a result of individuals loading
their own particular designs to be printed on garments, today shoppers can take advantage of web stores which offer huge variety of designs for
which shoppers will pay a premium under the assumption that they will be unique when wearing such garment or at the very least be one of a
few and not many.
25
Table of Contents
● Influence of Social Media. The means through which customers gather information to inform purchase decisions has also evolved in today’s
digital world. According to a study by PwC, 74% of consumers were influenced by social media in making online shopping decisions in 2017.
We believe this trend further promotes the shift to the online retail channel. Personal expression today is also associated with subscribing to
certain interest groups which promote ideas, concepts, designs, etc. Such affiliation drives significant on demand printing, many times creating
short term huge surges in demand
● Consumer Preference. Today’s consumer is leveraging the online channel for apparel purchases at a pace that far exceeds traditional brick
and mortar purchases. According to a report by Internet Retailer, the online channel represented 30.0% of U.S. apparel sales in 2017, up from
17.0% in 2015. The market share gain corresponds to apparel revenue growth of 19.7% in the online channel and only 1.1% growth in the brick
and mortar channel. We believe our installed base reflects the convergence of the growth in online apparel retail and the growth in digital
printing.
● Sustainability. Shoppers are constantly becoming more conscious of environmental impact of what they consume. The textile production
market is notorious for pollution and negative impact on the environment. Our proprietary process of digital printing is more eco-friendly than
current analog printing and as such can win the favor of shoppers to whom environmental impact is a priority.
● Proximity decoration. Retailers and apparel manufacturers need to respond quickly to daily changes in market trends coupled with the move to
same or next day delivery cycle times. This has precipitated a move to proximity decoration, whereby digital printers, which have no
environmental footprint, are placed in densely populated areas to execute demand of online shoppers.
● New business models have developed in response to the evolution of these consumer trends and the rapid growth of the online retail market. Our
solutions enable this category of “web-to-print” businesses to fulfill consumer demand more quickly and cost-effectively in a manner that is
differentiated from traditional brick and mortar businesses.
● A number of large scale web-to-print platforms have emerged. These platforms often leverage digital printing solutions to facilitate business for
a variety of content creators. The ecosystem of web-to-print businesses which we currently serve includes
● Self-Fulfillment. Companies manufacturing and selling their own designs which are advertised on their own websites and through other
marketing means.
● Hybrid Printers. Companies who both manufacture in-house and outsource manufacturing to third party fulfillment providers, who are often
also our customers.
● Third Party Fulfillment Centers. Companies serving as third party fulfillment for other businesses. Demand for these businesses is typically
generated online through other web retailers.
Proximity to the consumer is a key factor for these businesses since it minimizes shipping costs and enables them to offer rapid turnaround. In many
cases, retailers have asked us for assistance in identifying our local customers to help with their fulfillment.
The following characteristics of digital textile printing have enabled these new business models and are driving the shift from analog to digital textile
printing:
● Manufacturing flexibility. Digital textile printing allows a full image or design to be printed on a garment or cut fabric in one manufacturing
step compared to multiple steps in an analog printing process. Digital textile printing gives manufacturers the ability to print small runs, with
personalization capabilities, in a cost-effective manner with a minimum order quantity of one unit.
● Design flexibility. Digital textile printing enables a larger variety of artwork to be imprinted, without limitations on number of colors per design
and high-resolution imaging.
26
Table of Contents
● Reduced time between design and production. The digital textile printing process allows for samples to be quickly produced, evaluated, and
modified, which permits brand owners to increase the frequency and variety of replenishment cycles in response to fashion trends.
● Decreased risk of excess inventory. The costly and time-consuming upfront setup required in analog production methods is avoided when
using digital printing technologies. Therefore, digital printing enables the cost efficient production of a smaller quantity of garments which
mitigates excess inventory risk and improves profitability. Stocking blank garments or fabric and decorating them only when demand is
identified significantly reduces the amount of inventory at risk. This reduction in working capital requirements has enabled the emergence of
numerous online businesses which are focused on the sales of printed textiles.
● Reduced labor and physical space requirements. Digital textile printing requires significantly less labor to print an equivalent output due to the
significant reduction in process steps. The unique Kornit proprietary process of digital textile printing process also reduces the need for floor
space for manufacturing equipment by eliminating certain process steps and by consolidating multiple process steps into a single printing
system. The combination of labor savings and smaller shop floor footprint, coupled with lower energy consumption and a lack of environmental
impact, enables manufacturers to move production closer to consumers in a cost-effective manner. Textile business is very seasonal and the need
to retain employees bares a heavy financial burden. The move to digital printing significantly reduces the need for manpower and allows for a
more flexible cost structure.
● Ability to fulfill orders on one by one basis. Unlike screen printing, digital printing cost remains the same when printing a single unit or multiple
units. This allows printers to execute orders one by one without needing to accumulate large demand for a particular design before printing.
In addition to these consumer driven trends, the textile printing industry is being impacted by environmental considerations. Regulatory bodies and
consumers are increasingly focused on social responsibility and eco-friendly manufacturing, demanding that custom decorators, online businesses, brand
owners and contract printers reduce the negative environmental impact of textile treatment and dyeing, which represents a significant portion of total
industrial waste water. Digital textile printing significantly reduces industrial water consumption and discharge of toxic chemicals by eliminating the need to
wash screens for color changes and repeated use. We believe that this results in reduced environmental impact and, in turn, enables manufacturers to comply
with regulatory and brand guidelines at a location of their choosing, in many cases in populated areas which are not industrial in nature.
Overview of Textile Printing Processes
The graphic and accompanying description below present various textile printing processes:
27
Table of Contents
Analog Printing Processes
Screen printing is the most commonly used printing process for textiles. The two primary methods of screen printing are rotary screen printing and
automated carousel screen printing.
The following chart summarizes the key steps involved in the analog printing process:
● Rotary screen printing. Rotary screen printing is commonly used to print on outerwear, underwear, sportswear, upholstery and linens. It
involves multiple, time-consuming process steps. Rolls of fabric pass through rotating cylinders that are engraved with the image or design to be
printed. Each cylinder then applies ink of a different color, which forms part of the image or design. This process is generally used to print a
pattern on a fabric roll that is then cut and sewn into finished products. Rotary screen engraving is a costly process that takes between four and
five hours per cylinder and is frequently done offsite. Preparation of colors typically takes an additional 30 minutes and the setup of the printer
itself typically takes nearly 1.5 hours. The process can require up to seven people. The maximum size of an image or design is limited based on
the circumference of the cylinders, which is typically no more than 60 centimeters.
The following chart depicts the analog rotary screen printing process:
● Automated carousel screen printing. Automated carousel screen printing is commonly used to print on finished garments and cut pieces. In
automated carousel screen printing, a blade or squeegee squeezes printing paste or ink through mesh stencils onto fabric. The process typically
employs a series of printing stations arranged in a carousel. At each station, one color of ink is pressed through specially prepared mesh stencils,
or screens, on to the textile surface. Between color stations, there are also flash drying stations and cool down stations to ensure that deposited
ink does not inadvertently mix with the next color to be applied. Preparation of the mesh stencils is a specialized process and its complexity is a
function of the number of discrete color separations and screens that need to be prepared for a given design. The process of color separations,
film production, and screen exposure and alignment, typically takes approximately 1.5 hours for six colors. Once the screens and color
separations are complete, preparation of the carousel typically takes between 40 and 60 minutes. After being manually loaded, the textile moves
along the carousel from station to station where each color is applied separately. Unlike rotary screen printing, carousel screen printing does not
require fixing the image or design with steam or hot air and, in most cases, does not require washing and drying the textile afterward.
28
Table of Contents
The following chart depicts the automated carousel screen printing process:
Digital Printing Processes
Digital textile printing uses specially engineered inkjet heads, rather than screens and cylinders or mesh stencils, to print images and designs directly
onto fabrics. As such, the use of digital technology eliminates multiple complicated, costly and time-consuming steps, such as screen preparation or cylinder
engraving, preparation of pastes or inks, and screen or cylinder alignment.
Most fabrics need to be pre-treated before printing by submerging them in a solution that is designed specifically for the type of fabric and ink being
used. This coating process is essential for achieving the desired chemical reaction between the ink and the fabric. The fabric is dried following pre-treatment.
After the ink drops are applied, the printed fabric undergoes a process of fixation that is also specific to the type of fabric and ink being used. Digital textile
printing generally uses either dye-based or pigment-based ink.
The digital textile printing market principally includes two types of printing processes:
● Direct-to-Garment (DTG).
In DTG printing, an inkjet printer prints directly on the textile. DTG printing allows for printing images and
designs onto finished textiles, such as t-shirts that have already been sewn and dyed. The following chart summarizes the key steps involved in
the DTG printing process:
● Roll-to-Roll (R2R).
In R2R printing, rolls of fabric pass in-line through wide-format inkjet printers that are utilized to directly print images
and designs onto rolling fabric. The following chart summarizes the key steps involved in the R2R printing process:
Recent technological developments in digital printing have supported the adoption of digital printing by the global printed textile industry, including
by custom decorators, online businesses, brand owners and contract printers. As a result of consumer and macro trends impacting these businesses, we believe
that the global printed textile industry offers a significant and rapidly growing market for digital printing solutions.
29
Table of Contents
Overview
Business
We develop, design and market innovative digital printing solutions for the global printed textile industry. Our vision is to revolutionize this industry
by facilitating the transition from analog processes that have not evolved for decades to digital methods of production that address contemporary supply,
demand and environmental dynamics. We focus on the rapidly growing high throughput, direct-to-garment, or DTG, and roll-to-roll, or R2R, segments of the
printed textile industry. Our solutions include our proprietary digital printing systems, ink and other consumables, associated software and value added
services that allow for large scale printing of short runs of complex images and designs directly on finished garments and fabrics. Our solutions are
differentiated from other digital methods of production because they eliminate the need to pre-treat fabrics prior to printing, thereby offering our customers
the ability to digitally print high quality images and designs on a variety of fabrics in a streamlined and environmentally-friendly manner. When compared to
analog methods of production, our solutions also significantly reduce production lead times and enable customers to more efficiently and cost-effectively
produce smaller quantities of individually printed designs, thereby mitigating the risk of excess inventory, which is a significant challenge for the printed
textile industry.
There are a number of trends within the global printed textile industry that we believe are driving greater demand for our solutions. Consumers are
continuing to seek to differentiate themselves by wearing customized and personalized garments with colorful and intricate images and designs. Consumers
are also increasingly purchasing retail products online, with apparel representing the largest portion of this market. Brand owners and contract printers are
seeking methods to shorten time to market and reduce production lead times in order to more efficiently and cost-effectively produce smaller runs of printed
textiles and reduce the risk of excess inventory while concurrently meeting consumer demands. As consumers increasingly shift to online retail channels,
there is an increased need for brand owners and contract printers to improve efficiency, as consumers demand more varied product offerings and faster
fulfillment of orders. Simultaneously, regulatory bodies and consumers are increasingly focused on social responsibility and eco-friendly manufacturing,
demanding that printed textile manufacturers reduce the negative environmental impact associated with the manufacturing of printed textiles. Our solutions
address these trends by enabling our customers to print smaller quantities of customized products in a time efficient, cost-effective and environmentally
friendly manner, effectively allowing them to transition from customary methods of supply and demand to demand and supply, a model by which decoration
of fabric only takes place once a customer order has been issued.
The success of online apparel retail is dependent heavily on the ability to show large variety of designs. Since it is difficult to predict shopping
preference, it is increasingly difficult to stock every possible design. Unlike the physical experience of shopping at a brick and mortar store, where a sales
person has the opportunity to influence our buying decisions, we are free to move from one website to another with the simplicity of a mouse click. Online
stores are concerned with the possibility that certain selected items not be in stock or carry a long lead time as such response will most likely lead a shopper to
“churn” to another website. Having digital capacity available allows printers to offer unlimited design with minimal to no inventory risk and we believe we
are well positioned to take advantage of this trend.
30
Table of Contents
We have developed and offer a broad portfolio of differentiated digital printing solutions for the DTG market that provide answers to challenges
faced by participants in the global printed textile industry. Our DTG solutions utilize our patented wet-on-wet printing methodology that eliminates the
common practice of separately coating and drying textiles prior to printing. This methodology also enables printing on a wide range of untreated fabrics,
including cotton, wool, polyester, lycra and denim. With throughputs ranging from 32 to 250 garments per hour, our entry level and high throughput DTG
solutions are suited to the needs of a variety of customers, from smaller commercial operators with limited budgets to mass producers with mature operations
and complex manufacturing requirements. Our patented NeoPigment ink and other consumables have been specially formulated to be compatible with our
systems and overcome the quality-related challenges that pigment-based inks have traditionally faced when used in digital printing. Our software solutions
simplify workflows in the printing process, by offering a complete solution from web order intake through graphic job preparation and execution. We also
offer customers maintenance and support services as well as value added services aimed at optimizing the use of our systems.
Building on the expertise and capabilities we have accumulated in developing and offering differentiated solutions for the DTG market, we market a
digital printing solution, the Allegro, targeting the R2R market. While the DTG market generally involves printing on finished garments, the R2R market is
focused on printing on fabrics that are subsequently converted into finished garments, home or office décor and other items. The Allegro utilizes our
proprietary wet-on-wet printing methodology and houses an integrated drying and curing system. It offers the first single-step eco-friendly, stand-alone R2R
digital textile printing solution available on the market. We primarily market the Allegro to web-based businesses that require a high degree of variety and
limited quantity orders, as well as to fabric converters, which source large quantities of fabric and convert untreated fabrics into finished materials to be sold
to garment and home décor manufacturers. We believe that with the Allegro we are well positioned to take advantage of the growing trend towards
customized home décor and on-demand fabric printing. We began selling the Allegro commercially in the second quarter of 2015.
We were founded in 2002 in Israel, shipped our first system in 2005 and, as of December 31, 2017, had over 1,100 customers globally. As of
December 31, 2017, we had 412 employees located across four regions: Israel, the United States, Europe and the Asia Pacific region. In the year ended
December 31, 2017, we generated revenues of $114.1 million, representing an increase of 5.0% over the prior fiscal year. In the year ended December 31,
2017, we generated 53.1% of our revenues from the Americas, 8.1% from EMEA, 14.1% from the Asia Pacific and 4.7% from other regions.
Our Competitive Strengths
The following are our key competitive strengths:
● Leading player in fast-growing digital DTG market. We are a leading player in the fast-growing digital DTG market based on our sales and
have over 1,100 customers globally. We estimate that global revenue from digital textile printing equipment and ink will grow at a 15.7% CAGR
between 2016 and 2021 based on the estimate of such revenue for 2016 and the projection for 2021, in each case, contained in the Pira report. In
2016, we grew our revenues 25.8% compared to 2015 and, in 2017, we grew our revenues 5% compared to 2016. We believe that high
throughput DTG applications in the textile printing market are positioned to grow at a rate greater than the 15.7% overall industry growth rate
projected between 2016 and 2021. We have outperformed the industry growth rate over the past several years, growing our revenue at a 26.7%
CAGR from the 12 months ended June 30, 2014 to the 12 months ended June 30, 2016, versus an industry CAGR of 15.6% for the same period,
as estimated in the Pira report. The Pira report estimates that the DTG market has an addressable opportunity of six to 10 billion garments a
year. According to a prior Smithers Pira report published in 2014, over 300,000 sites globally print primarily t-shirts and other apparel.
● Well positioned to disrupt the R2R market with our unique single-step manufacturing solution. We believe we are well positioned to
capitalize on the growing trend toward customized home décor with our unique R2R solution. Our Allegro system combined with our
proprietary process was designed to offer a single-step manufacturing solution which is especially suited for businesses which don’t have a
vertically integrated textile mill. Unlike other digital textile printers, the Allegro does not require multiple pre-processing and post-processing
steps which are customarily used in vertically integrated textile mills and which utilize high levels of energy and space and have a negative
environmental impact. Given its architecture, it is perfectly suited for short and micro runs. Allegro is compact in size and requires a single
person to operate and fits very well in an urban and non-industrial setting. Allegro is unique in its ability to print on multiple fabric types
without the need for different inks and consumables, while generally other systems and technologies for R2R digital printing require dedication
of discrete printers to specific fabric types.
31
Table of Contents
● Disruptive technology that enables our customers to adopt new or improve existing business models. Our digital printing solutions allow
our customers to develop new or improve existing business models by enabling them to produce short to medium runs of high-quality
customized garments efficiently. This also facilitates “web to print” business models that manufacture on a “produce to order” basis and allows
brand owners to produce garments in house. With a constantly growing worldwide customer base of over 1,100 customers, we are witnessing
the creation of a global fulfillment network of printing specialists which are leveraged by large numbers of websites that offer customizable
garment printing services. As demand from these customers continues to grow so does utilization of our systems which in turn consume more
ink and once used to their full capacity require purchasing of more systems.
● Attractive business model. We currently offer a broad portfolio of differentiated digital printing solutions for the digital DTG market. Our
existing and growing installed base of systems results in recurring sales of ink and other consumables, which are specially formulated to enable
our systems to operate at the highest throughput level. These recurring sales are generated at attractive gross margins. Recurring sales of ink and
other consumables have historically offered us a degree of visibility into a significant component of our results of operations. We believe that
our recurring sales model also enables us to foster close customer relationships as it facilitates ongoing engagement with our customers, which
positions us to provide tailored solutions and expands our ability to provide value added services to our customers. Our customer relationships
are further strengthened by a trend towards ownership of multiple systems, as the number of customers with at least two systems has grown
from 155 as of December 31, 2014, to 246as of December 31, 2017 and the number of customers with at least 10 systems has grown from nine
as of December 31, 2014, to 17 as of December 31, 2017. We anticipate revenue from services to increase over time as we reach upgrade cycles
across our growing installed base. Additionally, sales of ink and other consumables are generally higher in high throughput systems such as the
Vulcan, Avalanche and Allegro systems. Large accounts typically run at high utilization rates and can consume up to five times as much ink per
year compared to other accounts. By developing and implementing proprietary end-to-end solutions for our customers, we believe our business
model is differentiated from more commoditized solutions serving the same end markets. We have proven our ability to grow revenues while
maintaining an attractive margin profile and we intend to continue investing in our business to drive profitable growth in the future.
● Robust intellectual property portfolio driven by an innovation-based culture. Our intellectual property portfolio reflects over a decade of
significant investments in digital textile printing, which we believe creates significant barriers to entry. We have developed a strong base of
technology know-how, backed by our portfolio of intellectual property, which includes 25 issued patents and 22 provisional or pending US
applications, 27 pending non-US patent applications and 10 pending PCT applications that cover wet-on-wet printing methodology, ink
formulations, printing processes and related methods and systems. Our team of over 122 researchers and developers, including chemists,
electrical engineers, system engineers and mechanical engineers, ensures that our systems remain technologically advanced, and are well
engineered, user-friendly and highly reliable.
● Extensive product portfolio and strong new product pipeline. With throughputs ranging from 32 to 250 garments per hour, our DTG
systems are suited for smaller industrial operators with limited budgets, as well as mass producers with mature operations and complex needs.
Since 2015, we have commercialized two new solutions in the market: the Allegro, a one-step, integrated R2R printing, drying and curing
system, and the Vulcan, a cost-effective digital substitution for carousel screen printing. Our future roadmap remains focused on the continued
development of proprietary processes, continuously expanding the breadth of applications upon which we can print while pushing the envelope
of cost efficient manufacturing further as a means to expand our servable addressable markets.
32
Table of Contents
● Taking advantage of a digital revolution. Every digital printing revolution starts with printing small quantities of particular designs where the
advantages of digital technology are most pronounced. The ability to expand the addressable market of digital printing relies heavily on constant
reduction of cost per printed unit (CPP). Given our deep technological foundations, we have been able to constantly reduce CPP by increasing
system output as well as increasing the efficiency of our inks, allowing customers to consume less ink while achieving excellent results. Given
this progression, we are now able to offer a cost effective alternative to screen printing for runs of up to 500 garments, making our products a
viable printing solution for large scale retailers who now seek to move to quick inventory replenishment and are constantly moving to shorter
and shorter runs of production.
● Product upgrade strategy. In 2016 we started implementing a long-term strategy for supporting our installed base with upgrade paths to newer,
more advanced, systems. The goal of this strategy is to allow our customers to extend the return on their investment in Kornit systems, and in
return, we enjoy growth in capacity.
● Environmentally friendly printing processes. A significant portion of global industrial water pollution comes from textile dyeing, printing
and finishing. We believe that environmental factors are beginning to assume a significant role in the decision-making process of our existing
and potential customers, with an increasing number of countries adopting restrictions on the use of technologies like screen printing that
generate significant wastewater. Our printing process eliminates the need for separate pre-treatment, as well as steaming, washing or rinsing of
textiles during the printing process, which leads to a significant reduction in water consumption compared to conventional printing methods. In
addition, our inks are biodegradable and certified by leading industry groups as being safe for system operators, consumers and the environment.
Finally, our systems offer energy saving processes that result in the use of significantly less power compared to traditional printing processes.
We believe that these environmental benefits will further drive market penetration of our solutions and enable manufacturers to move production
closer to the consumer in a cost-effective manner.
● Strong management team. Our Chief Executive Officer, Gabi Seligsohn, and our Chief Financial Officer, Guy Avidan, bring extensive
experience of managing publicly traded companies. Our management team’s industry expertise, history with our company and extensive
experience in running global publicly traded companies will enable us to execute our growth strategy. Our management infrastructure also
includes executives who are experienced in the management of people, large scale business, innovation and product development in larger
organizations including Intel, HP, KLA Tencor and Stratasys. Over the past three years, we have also invested heavily in human resources to
support our growth. Since 2013, our workforce has more than doubled from 190 to 412 as of December 31, 2017. Additionally, more than 150
of our employees are in the field, enabling us to provide more localized service for our customers.
Our Strategy
The following are the key elements of our growth strategy:
● Increase sales to existing customers. We are focused on increasing sales to existing customers by introducing new digital printing
applications, developing new features and functionality of our systems, offering new system upgrade products, increasing sales of software and
services, selling systems from our additional product families and enabling our customers to increase utilization of systems by improving
productivity and reliability. We also intend to actively refer business to our customers by connecting them with online businesses that seek
fulfillment partners, which will enhance customer intimacy. Our direct sales and marketing teams and application development professionals
play an active role in customer education and this referral process. Our objective is to help customers operate their businesses more efficiently
and to increase utilization of their systems, thereby requiring more ink and other consumables purchases as well as potential investment in new
systems as our customers require additional capacity.
33
Table of Contents
● Acquire new high volume customers. Our technology is ideally positioned to enable business models focused on mass customization and
personalization. We plan to continue growing our customer base by targeting customers with growth business models and demand for our high
throughput solutions, including multiple systems or fleets of our systems. An example of this strategy is the Master Purchase Agreement, signed
on January 10, 2017, with an affiliate of Amazon.com, Inc. To date we have supplied several systems, large quantities of inks and consumables
and have been providing paid service to multiple facilities. During the years 2016 and 2017, Amazon related revenues were $17.9 million and
$14.4 million, respectively. We expect that our relationship with Amazon will continue to expand in the future and that they will remain a
significant customer.
● Capitalize on growth in our targeted markets. Evolving consumer behavior is driving the growth in digital printing as well as the shift to
online retail. Since the online shopping experience relies heavily on the display of large varieties of designs as well as short cycle times from
order to delivery, webstores are faced with a need to carefully manage inventories, which requires the new paradigm of demand and supply. Our
solutions enable our customers to print in smaller, customized quantities in a time efficient, cost-effective and environmentally-friendly manner,
effectively leading them to move from customary methods of supply and demand to this new paradigm. Digital textile printing allows retailers
to establish new fulfillment centers (or re-task existing ones) in different parts of the world to support consumers’ demand for variety, while
shortening lead times from order to delivery and protecting against excess or obsolete inventory risks. With over 1,100 customers globally, many
of which operate as fulfillment centers, we believe we are well positioned to play an enabling role for this trend. Our high throughput systems
and proprietary inks ensure replicable quality and maximum uptime, which in turn, allow our customers to address the demands of online retail.
We will continue tailoring our solutions to meet the needs of our customers in this evolving consumer environment through the ongoing
development of our technology and the continued investment in the development of new ink formulas for our systems in order to expand the
range of fabrics on which we can print and further improve the quality of our high resolution images and designs.
● Extend our serviceable addressable market (SAM) by continuing to enhance our solutions. We will continue to expand our SAM as we
introduce new features and functionality that enhance the capabilities of our systems and inks, and enable our systems to print on new types of
media. We are also continuing to drive adoption of digital DTG printing solutions by customers who primarily use screen printing carousels,
which is how the majority of DTG printing jobs are currently performed. While we have started to penetrate this market by offering standalone
DTG solutions, such as our Avalanche and Storm II systems, we plan to deepen our penetration and further transition users of these analog
systems to digital printing technologies through our Vulcan system. Given Vulcan’s ease of setup, lower cost per print, and high throughput
levels, we are seeking to disrupt the core screen printed textile industry and target replacement of a significant installed base of automated
carousels. We have also begun to expand our SAM by selectively targeting the digital R2R market through our Allegro system, which offers
customers the ability to produce limited quantity orders with a high degree of variety and uniquely supports multiple fabric types in a single-step
R2R printing process. We believe that our technology portfolio and the industry expertise of our employees and partners will allow us to
continue to deliver a broad base of textile solutions to our customers that meet the challenges of printing on textile substrates. Continuing to
respond to these challenges will enable us to further expand our SAM as we produce higher quality prints on a wider set of fabrics. This will
enable us to expand into areas such as the $97 billion “athleisure” market, where clothing designed for workouts and other athletic activities is
worn in other settings.
● Extend our leadership position through ongoing investments in research and development, acquisitions and strategic partnerships. We
seek to continue to differentiate ourselves and extend our leadership position by investing in research and development, acquisitions and
strategic partnerships. We intend to leverage our customer relationships to identify emerging industry needs and innovate and develop new
intellectual property and applications that address those needs. We are also developing new systems and intend to develop and introduce
additional systems in the future. From time to time, we may also supplement our internal efforts with complementary inorganic initiatives such
as acquisitions and strategic partnerships in order to enhance our positioning. For example, our acquisition of Polymeric Imaging in 2015
expanded our ink technology capabilities, and our acquisition of the digital DTG printing assets of SPSI in 2016 enabled us to strengthen our
sales channel and gain access to a large screen printing customer base that we can now target for sales of digital solutions. Each of these
acquisitions enhanced the positioning of our company. Future acquisitions may also allow us to strengthen our existing portfolio of solutions or
add new capabilities. In an effort to better inform current and prospective customers about the capabilities of our solutions, we have also made
investments in our direct sales and marketing teams and application development professionals.
34
Table of Contents
Our Systems
Our line of DTG systems offers a range of performance options depending on the needs of the customer. These options include the number and size
of printing pallets, number of print heads, printing throughput and process ink colors, as well as other customizable features. We categorize our DTG systems
into two groups that are focused on the industrial segment of the DTG market: entry level and high throughput. As our business and marketplace has evolved,
we have shifted the mix of our system sales primarily to high throughput systems.
● Entry Level. We currently have one entry level system, our Breeze system. This system reduces the need for floor space for manufacturing
equipment by eliminating certain process steps and by consolidating multiple process steps into a single printing system. The Breeze allows
businesses to adopt digital technology with a limited upfront investment and use the same technology as our high throughput systems but with
smaller garment printing areas and at lower throughput levels.
● Industrial Direct to Garment. We offer a wide range of high throughput systems. We market a hybrid platform, the Paradigm II, which
connects to existing screen printing carousels for customers who want to combine short runs of multicolor images into their ongoing screen
printing operations. Our mid-level platform, the Storm, which employs one axis of print heads and two pallets, consists of four models (Storm 2,
Storm Hexa, Storm Duo and Storm 1000). Our next level of high throughput systems is based on the Avalanche platform which employs two
print head axis with two pallets and also comes in four different models (Avalanche, Avalanche DC, Avalanche 1000, Avalanche Hexa,
Avalanche 1000R, Avalanche HexaR).
During 2017, we introduced a significant product improvement on the Avalanche platform in the form of the new R-Series systems.
Incorporating a new print heads technology and ink delivery system architecture, we introduced an advanced system for ink waste management,
improving our customers profitability. The Avalanche 1000-R and the Avalanche Hexa-R systems replaced the former Avalanche 1000 and
Avalanche Hexa systems respectively. In alignment with our products upgrade strategy an upgrade path from existing installed systems was also
added to our product offering, allowing us to gain revenues from existing systems.
● Direct to Garment Mass Production. During 2016, we successfully commercially launched our new high throughput platform, the Vulcan which
is geared towards addressing the needs of mass production at a significantly lower cost per print relative to our other systems.
Our systems vary in throughput and productivity, applications of use, breadth of color gamut and cost per print. The underlying strategy behind our
system lineup is to accommodate a variety of customer needs with a variety of capabilities and at a variety of price points. All of our DTG systems utilize our
patented wet-on-wet printing methodology that involves spraying a wetting solution on the fabric before applying our proprietary pigment-based inks. This
unique capability enables our systems to reach high throughput levels while still producing high quality images and designs. The wetting solution prevents the
ink from bleeding into the textile and fixes the ink drops, which enables digital printing with high color-intensity and image sharpness. This methodology
eliminates the common practice of separately coating and drying textiles prior to printing and allows for printing on a wide range of untreated fabrics.
35
Table of Contents
Our Vulcan system is designed to enable mass production of customized garments with high and consistent printing quality. It is designed to run at
throughputs higher than any of our existing systems. The system’s architecture takes a different ergonomic approach to the sequence of loading and unloading
of garments than that of our existing systems, enabling higher throughputs. The system utilizes state of the art print head technology and specially designed
inks which allow for significant reduction in cost per print due to an increase in color intensity which allows for use of less ink per printed area as well as a
reduction in wasted ink as a result of a transition to recirculating print heads. We achieved initial sales of Vulcan in the fourth quarter of 2016. Given the
Vulcan’s ease of setup and high throughput levels, we are seeking to disrupt the core screen printed textile industry and target replacement of a significant
installed base of automated carousels. The Vulcan also capitalizes on our advanced print head and ink technology to limit waste, allowing for installation in
locations where carousels cannot be installed due to environmental, health and safety laws and regulations.
Our Allegro system is the first R2R printing system to allow for one-step R2R printing. It combines a printing system and a drying and curing
module so that a full end to end manufacturing process is enabled. Unlike the Allegro, all other R2R printers require additional steps. The Allegro takes
advantage of our patented wet-on-wet methodology to allow for in-line printing on various fabrics, without requiring a separate pre-treatment process, thereby
avoiding the need to use textiles that are specifically pre-treated for digital printing. The Allegro is designed to achieve high throughputs and does not require
water or steam for any part of the printing process, making it friendly to the environment. By using our proprietary pigment-based ink, Allegro can print on a
variety of natural and synthetic fabrics providing customers with a significant level of flexibility. Other dye-based systems are specifically designed to print
on specific fabric types and cannot be used with other types of fabric as the processes and consumables used vary considerably from one to the other.
Our systems range in price from $60,000 to over $800,000 and consume an average of $5,000 to $300,000 of ink and consumables annually per
system.
DTG Systems
The following table summarizes key aspects of our DTG systems, all of which are compatible with a wide range of fabrics, including cotton, wool,
polyester, lycra and denim and print at maximum resolutions ranging from 600 to 1,200 DPI. Our systems are currently unable to print at a level of quality
acceptable for large scale manufacturing on dyed polyester or nylon. However, we are in advanced stages of developing the capability to print on dyed
polyester, giving us the opportunity to penetrate the $97 billion athleisure market.
System
Breeze
Storm II
Storm 1000
Storm Hexa
Storm Duo
Avalanche
Avalanche DC Pro
Avalanche 1000
Avalanche Hexa
Paradigm II
Vulcan
Target Customer
Entry Level
High Throughput
High Throughput
High Throughput
High Throughput
High Throughput
High Throughput
High Throughput
High Throughput
High Throughput
High Throughput
Effective Throughput
Light/Dark Garments(1)
32/25
120/65
170/85
170/85
190/N.A
150/100
150/100
220/160
180/140
120/120
250/250
Colors
CMYK + White
CMYK + White
CMYK + White
CMYKRG + White
CMYK + White
CMYK + White
CMYK + White + Discharge ink
CMYK + White
CMYKRG + White
CMYK
CMYKRG + White
Max. Printing Area
14 x 18 in
20 x 28 in
20 x 28 in
20 x 28 in
20 x 28 in
23.5 x 35 in
23.5 x 35 in
23.5 x 35 in
23.5 x 35 in
15.5 x 19.5 in
28 x 39 in
(1) Maximum output for sellable product for dark and light garments. Output for all systems, except the Vulcan, is measured in High Productivity print mode
using A4 size prints per hour with pretreatment included. Output for the Vulcan system is measured in Standard print mode using 12 x 12 in size prints
per hour with pretreatment included.
36
Table of Contents
Ink and Other Consumables
Our ink and other consumables consist of our patented NeoPigment ink, proprietary binding agent, priming fluid, wiping fluid, and flushing fluid.
Our pigment based inks are available in ten colors and are formulated for optimal use exclusively in our systems. Our patented wet-on-wet printing
methodology combines the use of pigments rather than dyes in conjunction with our proprietary binding agent, and allows us to print on a wide range of
fabrics without the need for a separate pre-treatment process or system reconfiguration, resulting in minimal setup times for each run and high throughput
levels. Given the proprietary nature of our printing methodology, our ink and consumables attachment rate is near 100%. We also continuously invest in the
development of new ink formulas for our systems in order to expand the range of fabrics on which we can print, further increase the quality of our high
resolution images and designs and improve color fastness.
We have developed two patented methods for printing on dark or colored fabrics. The first method involves printing a layer of specially formulated
white ink as a base upon which to print colored images and designs. Printing on top of this foundation enhances color intensity and creates contrast against the
dark or colored fabric. In addition, we have developed a patented discharge ink for printing on dark or colored fabrics. The discharge ink bleaches the fabric
dye and applies colored ink in the locations where the discharge ink removed the fabric dye. This method, which is primarily used by brand owners and
contract printers, allows the printing of high resolution images and designs without compromising the texture or feel of the garment.
Software Solutions
All of our DTG systems arrive with our QuickP Production software embedded. The software manages the system operation and prepares image
files for print. QuickP Production is a simple to use solution that allows users to control key operating parameters, such as ink dots per inch, or DPI, perform
maintenance and calibration procedures and import image files and prepare them for print.
Many of our customers also purchase our QuickP Designer standalone software. QuickP Designer is a software package that combines our own
internally developed Raster Image Processing, or RIP, software with other print job management capabilities and includes an advanced ink consumption
estimation tool. A single QuickP Designer license can be used to support multiple Kornit systems.
We also offer our QuickP Plus 2.0 software suite, which provides customers with a full workflow solution from design creation and acceptance of
job orders through production and order management.
In an effort to continually increase our customers’ productivity and ease of use, we initiated several collaborative efforts during 2017 with a few
software companies. For example, we entered into a collaboration with Custom Gateway. As part of this collaboration, Custom Gateway provides a
framework for enabling mass customization and on demand fulfilment and enables Kornit’s customers to sell customizable products online. We have also
collaborated with ColorGate, which provides a professional RIP solution for our systems, allowing Kornit’s customers to gain both an outstanding print
output and an optimized workflow experience.
37
Table of Contents
Our Services
Our services consist of maintenance and support, and professional services. We are seeking to increase the number of customers that rely on us to
provide services for their systems by expanding our service capabilities. As of December 31, 2017, we had service contracts in place with approximately 13%
of our installed base. Service revenues exceeded 10% of our overall revenues for the first time in 2017 and amounted to $12.1 million. In addition to driving
gross margin improvement, we believe this will provide us an opportunity for direct contact with customers with the goal of reducing system down-time,
educating customers about optimal use of our systems to drive increased utilization, expanding the variety of print applications and increasing sales of post-
warranty service contracts and other professional application development services. During 2016, we began to introduce hardware and software upgrades to
our existing systems.
Maintenance and Support
We typically provide a one-year warranty on our systems, which covers parts, labor and remote support. Our customers can also purchase an
additional year of warranty coverage in conjunction with their initial purchase of our systems. Thereafter, customers can renew maintenance and support
contracts for additional periods by purchasing a maintenance and support package that covers remote support, software upgrades and onsite yearly
maintenance or they can choose to rely on our support on a non-contractual time and material basis. In the United States, we provide maintenance and support
directly to our customers. In EMEA, we provide maintenance and support to approximately half of our customers, depending on their location. In the Asia
Pacific region, our independent distributors provide initial maintenance and support, and we provide second-line support when needed. Some of our printing
systems include mandatory second year warranty which secures services revenue and ensures long terms relationship with our customers.
Professional Services
Our systems are designed such that customers can operate them without our assistance or that of our independent distributors. However, nearly all
customers purchase our basic installation package and some take our advanced training program. Our advanced training program is an onsite tutorial ranging
from three to five days, which includes customized consulting aimed at optimizing the use of our systems. Courses are also provided at our regional offices.
We continuously seek to expand the number and content of the training programs. We provide professional services to customers in all regions both in person
and through advanced web based learning systems.
Our Customers
Our diverse global customer base consisted of over 1,100 customers as of December 31, 2017.
Throughout our growing installed base, our customers are able to serve a variety of different business models, particularly the new business models
that have developed in response to the evolution of consumer trends and the rapid growth of the online retail market. Our solutions enable this category of
“web-to-print” businesses to fulfill consumer demand more quickly and cost-effectively in a manner that is differentiated from traditional brick and mortar
businesses. A number of large scale web-to-print platforms have emerged. These platforms often leverage digital printing solutions to facilitate business for
other content providers.
The ecosystem of web-to-print businesses which we currently serve includes:
● Self-Fulfillment. Companies manufacturing and selling their own designs which are advertised on their own websites and through other
marketing means.
● Hybrid Printers. Companies who both manufacture in-house and outsource manufacturing to third party fulfillment providers, who are often
also our customers.
● Third Party Fulfillment Centers. Companies serving as third party fulfillment for other businesses. Third party fulfillment providers include a
number of our customers. Demand for these businesses is typically generated online through other web retailers.
38
Table of Contents
Proximity to the end customer is a key factor for these businesses since it minimizes shipping costs and enables them to offer rapid turnaround to
consumers, which is a key factor in choosing where to buy online apparel. In many cases, retailers have asked us for assistance in identifying our local
customers to help with their fulfillment.
See “ITEM 10.D - Material Contracts - Agreements with Amazon.”
Sales and Distribution
Our go to market strategy consists of a hybrid model of indirect and direct sales. We generate a significant portion of our sales through a global
network of independent distributors and value added resellers that we refer to as our channel partners. Our channel partners, in turn, sell the solutions they
purchase from us to customers for whom we provide installation services, or sell and install our solutions on their own. Our channel partners work closely
with our sales force and assist us by identifying potential sales targets, closing new business and maintaining relationships with and, in certain jurisdictions,
providing support directly to our customers. Some of our independent distributors have our systems available for tradeshows, product demonstrations at their
facilities, and other promotional activities. As of December 31, 2017, our global network of channel partners consisted of approximately 70 independent
distributors and resellers. Sales by our distributors accounted for approximately 49% of our revenues in 2017, approximately 47% of our revenues in 2016
and approximately 64% in 2015. In addition to working closely with our channel partners, our direct sales force engages in direct sales in certain geographies,
and also with our largest customers, irrespective of their location. We continually evaluate our go to market strategy in the geographies we serve in an effort
to best serve our direct or indirect customers. As our roadmap continues to evolve, the sophistication of our systems and our selling prices will require us to
continue to advance the capabilities of our sales and marketing teams as well as those of our distributors.
A substantial portion of our sales in North America are performed through independent distributors. Hirsch International Corporation and SPSI, Inc.
were our top two independent distributors by revenues in 2015 and 2016, accounting for 18% and 21% of our revenues in each such period in the case of
Hirsch, and 15% and 7% of our revenues in each such period in the case of SPSI. Hirsch was our top independent distributor in 2017, accounting for 18% of
our revenues. We entered into a distributor agreement with Hirsch, dated April 1, 2014, with an initial term of three years, which renews automatically for
successive one-year periods unless one party notifies the other party that it does not wish to renew the agreement, by providing 90 days’ notice prior to the
end of the initial term of renewal period, as applicable. The agreement renewed automatically in April 2017. Our agreement with Hirsch is a non-exclusive
distribution contract across North America, including 28 states concentrated on the East and West Coasts of the United States, as well as five Canadian
provinces. We maintain projected sales plans for a number of different systems on a yearly basis and there is a minimum yearly sales requirement for systems
and ink and other consumables.
In July 2016 we acquired the digital direct to garment printing assets of SPSI. We had been partners with SPSI since 2004 and our agreement with
SPSI was previously a non-exclusive distribution contract across the United States, including 20 states mainly in the Midwest, Northwest and Southwest
regions. The decision to acquire the SPSI assets was made in light of the fact that the territory covered by SPSI had an increasing number of larger accounts
which required a more direct relationship with such customers. By fostering direct relationships with these customers, we aim to deepen our technical
relationship with them as well better align our product roadmap to meet their needs. Through the acquisition we attained access to over 5,000 screen printing
customers of SPSI, who represent a market opportunity for us to potentially provide systems that will facilitate their transition to digital printing. During
2017, we increased our sales headcount in the United States and split the region into three sub-territories in order to increase our presence in the market. We
also signed on two new distributors for the United States. As part of this effort we also decided to transition our US headquarters to New Jersey.
Marketing
Our marketing strategy is aimed at positioning us as a global leader in digital textile printing. We are focused on increasing awareness of our brand
and communicating the benefits of our disruptive technology and how it addresses market needs in order to develop leads and increase sales to existing
customers. We market our systems as a comprehensive solution to the growing trend towards mass customization and personalization. We seek to execute our
strategy by leveraging a combination of internal marketing professionals and a network of channel partners to communicate the value proposition and
differentiation of our systems, generating qualified leads for our direct sales force and channel partners. By investing in analytics-driven lead development
and through detailed interactions with key customers, we seek to create and update our product roadmaps and individual marketing plans to optimize
distribution while helping facilitate the process of release, ramp-up and sales.
39
Table of Contents
We use a variety of advanced inbound and outbound online marketing methods to reach and communicate with potential customers. Inbound
methods include a variety of online marketing strategies comprised of search marketing (for example, search engine optimization and pay per click
advertising), social media, blogs, syndication, webinars and white papers. Outbound channels include a fully automated e-mailer and web based customer
nurturing and scoring process, as well as more traditional marketing methods such as print advertisements, direct mail and e-mail, tradeshows, newsletters and
referrals. In addition, we have developed domestic and international onsite demonstration capabilities in our regional offices in the United States, Germany,
Hong Kong and China and we also rely on demonstration facilities setup by our channel partners.
Manufacturing, Inventory and Suppliers
Manufacturing
Our systems are currently assembled by Flex Ltd., or Flex, at its facilities in Yavne, Israel and ITS Industrial Techno-logic Solutions Ltd., or ITS, at
its facilities in Rosh Ha’Ayin, Israel. Aside from our print heads, we source many of the components of our systems directly, which we believe allows us to
manage our material costs and take advantage of the overall volume of systems manufactured at both facilities without the overhead of having in house
manufacturing.
We entered into a manufacturing services agreement with Flex in May 2015, pursuant to which Flex manufactures our Avalanche, Storm, Breeze and
Paradigm II systems and also manufactures our Vulcan system on a full turnkey basis in accordance with our bill of materials, drawings and designs. The
initial term of the agreement is three years and it renews automatically for additional periods of 24 months unless notice of termination is given by either
party at least 180 days prior to the end of the initial term or a renewal term. The agreement was automatically renewed in May 2017 for an addition 24-month
period. We can terminate the agreement at any time upon 180 days’ notice and Flex may terminate the agreement at any time upon 365 days’ notice. Prices
are set in advance for periods of 18 months but are subject to change based on certain enumerated circumstances set forth in the agreement or as agreed
between Flex and us.
Our agreement with ITS for manufacture of certain of our systems terminated in November 2017. We are currently negotiating with ITS on an
agreement pursuant to which ITS will continue to provide manufacturing services for one of our systems for a limited time.
We entered into a letter of agreement with Sanmina SCI-Israel Medical Systems Ltd. on September 7, 2017, pursuant to which Sanmina will
manufacture, assemble, test, inspect configure and ship our products. The letter of agreement is in effect for a period of six months and thereafter it shall be
renewed automatically for additional 90 days, unless one party provides the other with 30 days’ notice before the automatic renewal date. The parties are
negotiating the terms of a binding agreement.
We produce and bottle our ink and other consumables at our facility in Kiryat Gat, Israel using raw materials purchased from various suppliers for
milling pigments and mixing, bottling and packaging.
Inventory and Suppliers
We purchase our print heads from FujiFilm Dimatix, Inc., or FDMX, and then customize them at our Kiryat Gat, Israel facility, for optimal use in our
systems. We maintain an inventory of parts to facilitate the timely assembly of our systems and for servicing our installed base. Most components are
available from multiple suppliers, although certain components used in our systems and consumables are only available from single or limited sources.
40
Table of Contents
We first entered into an agreement with FDMX in 2006. In December 2015, we entered into a new agreement with FDMX. Pursuant to this
agreement, FDMX sells us print heads and additional by-products. Under the agreement, we are entitled to sell, lease and use the FDMX products and
components subject to certain limitations, including the use of FDMX products or components for applications other than printing images and designs on
textiles, reselling print heads other than as integral components of our systems, or as spare or replacement parts, and distributing in markets reserved by
FDMX. The agreement with FDMX also provides that we are required to make an additional semi-annual payment to FDMX based on the amount of inks,
other than inks and other consumables sold by FDMX, that we sell over a relevant period or, if we do not sell ink and other consumables, a payment based on
sales of our systems. We have granted customary audit rights to FDMX to verify the amount of sales that we make. The agreement provides that beginning
with the start of the first one-year renewal period, FDMX may increase the prices of the products that we purchase from it upon 90-days’ prior notice, subject
to certain conditions. Our current agreement terminates in December 2019 and provides for one three-year renewal period and one-year renewal periods
thereafter. Our agreement further provides that FDMX may, at its option, discontinue products supplied under the agreement, provided that we are given one
year’s notice of the planned discontinuance and are provided with an end of life purchase program.
A chemical used in some of our inks is supplied by BG Bond. We entered into an agreement with BG Bond in December 2016 pursuant to which we
agree to purchase and BG Bond agrees to produce this chemical at set prices. In exchange for an upfront payment, which is refundable upon the purchase of
the chemical, BG Bond agreed to install additional equipment dedicated to the production of the chemical. The agreement is for a term of five years or until
we purchase a certain agreed upon minimum quantity and cannot be terminated by us other than in case of material breach by BG Bond. For some of our
other inks, this chemical is supplied by The Dow Chemical Corporation, a large multinational manufacturer of chemicals. We currently purchase the chemical
from The Dow Chemical Corporation on a purchase order basis.
A component of our some of our systems is supplied by a sole supplier, Adelco Screen Process Ltd. We currently purchase this component on a
purchase order basis.
We consider our single and limited-source suppliers to be reliable, but the loss of any one of these suppliers could result in the delay of the
manufacture and delivery of our systems. In order to minimize the risk of any impact from a disruption or discontinuation in the supply of print heads,
emulsion or components from limited source suppliers, we maintain an additional inventory of such components. Nevertheless, such inventory may not be
sufficient to enable us to continue supplying our products during the period that may be required to locate and qualify a new supplier. See “Risk Factors — If
our relationships with suppliers, especially with single source suppliers of components, were to terminate, our business could be harmed.”
Research and Development
We believe that continued investment in research and development is important to position us as a global leader in digital textile printing. We
conduct our research and development activities in Israel and we believe this provides us with access to world-class engineers and chemists. Our research and
development efforts are focused on improving and enhancing our existing systems and services, as well as developing new systems, software, features and
functionality. We are also focused on enhancing our current DTG systems with new features and functionality, improving system reliability and uptime and
making our systems even more user-friendly, and investing in new chemistry for broadening our span of applications. Our research and development expenses
were $12.0 million, $17.4 million and $20.8 million in the years ended December 31, 2015, 2016 and 2017, respectively.
Intellectual Property
We consider our proprietary technology to be important to the development, manufacture, and sale of our systems and seek to protect such
technology through a combination of patents, trade secrets, confidentiality agreements and other contractual arrangements with our employees, consultants,
customers and manufacturers.
As of December 31, 2017, we owned fourteen issued patents in the United States and twenty-two provisional or pending U.S. patent applications.
We also had eleven patents issued in non-U.S. jurisdictions, along with twenty-seven pending non-U.S. applications, and have ten pending Patent Cooperation
Treaty patent applications, which are counterparts of our U.S. patent applications. The non-U.S. jurisdictions in which we have issued patents or pending
applications are China, the European Union or European countries of the European Union, Hong Kong, Israel, Canada, Australia, Republic of Korea, South
Africa, Vietnam, Philippines, Thailand, Brazil, El Salvador, Dominican Republic and India. The principal granted patents relate to our wet-on-wet printing
methodology, ink formulations, printing processes and related methods and systems, with expiration dates ranging from 2020 to 2035.
41
Table of Contents
We enter into confidentiality agreements with our employees, consultants, channel partners, customers and manufacturers and limit internal and
external access to, and distribution of, our proprietary technology through certain procedural safeguards. These agreements may not effectively prevent
unauthorized use or disclosure of our intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or
disclosure of our intellectual property or technology.
In addition, we own the registered trademarks “KORNIT,” “NEOPIGMENT” and the “K” logo, in numerous jurisdictions and make use of a number
of additional unregistered trademarks.
There can be no assurance that our patents or other intellectual property rights will afford us a meaningful competitive advantage. We believe that
our success depends primarily on our research and development, marketing, business development, applications know-how and service support teams and
application experts as well as our ongoing relationships with our large customer base. Accordingly, we believe that the expiration or termination of any of our
patents or patent licenses, or the failure of any of our patent applications to result in an issued patent, would not have a material adverse effect on our business
or financial position.
Competition
Textile printing is most commonly conducted using automated carousel screen printing. In recent years, manufacturers of digital printers have
increased their penetration of this market. As such, we compete with companies that manufacture automated carousel screen printers as well as those that
manufacture digital printers. Our principal competitor in the high throughput digital DTG market is Aeoon Technologies GmbH. We also face competition
from Brother International Corporation, Seiko Epson Corporation and a number of smaller competitors with respect to our entry level systems. Our
technologies allow us to offer a wide spectrum of digital textile printing systems of varying features, capacities and price points. We believe that this strategy
will enable us to effectively compete with the other textile printer and ink manufacturers in the digital DTG market.
Within the R2R market, we continue to see conversion from rotary screen printing to digital printing, as high throughput digital R2R systems are
now increasingly capable of printing complex, customized images and designs. Our competitors in the R2R market include Dover Corporation, through its
MS Printing Solutions S.r.l. subsidiary, Durst Phototechnik AG, Electronics for Imaging, Inc., through its Reggiani Macchine SpA subsidiary, Mimaki
Engineering Co., Ltd., and a number of smaller competitors. Our digital R2R solutions offer customers the ability to produce limited quantity orders, with a
high degree of variety, and allow us to uniquely support multiple fabric types in a single step R2R printing process, whereas competitive solutions require
multiple pre-processing and post-processing steps. We believe our differentiated, end-to-end solutions will enable us to effectively compete with other textile
printer and ink manufacturers in the digital R2R market.
C. Organizational Structure
Our corporate structure consists of Kornit Digital Ltd., our Israeli parent company, and five wholly-owned subsidiaries: (1) Kornit Digital
Technologies Ltd., which was incorporated on July 5, 2006 under the laws of the State of Israel, (2) Kornit Digital North America Inc., which was
incorporated on September 12, 2007 under the laws of the State of Delaware, (3) Kornit Digital Europe GmbH, which was incorporated on April 20, 2011
under the laws of Germany, (4) Kornit Digital Asia Pacific Limited, which was incorporated on November 18, 2009 under the laws of Hong Kong, and (5)
Kornit Digital UK Ltd., which was incorporated on August 30, 2017 under the laws of England and Wales.
42
Table of Contents
D. Property, Plants and Equipment
Our corporate headquarters are located in Rosh Ha’Ayin, Israel in an office and research and development facility consisting of approximately
82,000 square feet. The lease for this office expires in December 2020, with an option to extend the lease for an additional five years. We lease an additional
facility of approximately 8,000 square feet near our corporate headquarters. The lease for this additional space expires in December 2020, with an option to
extend the lease for an additional 18 months. In Israel, we also lease a manufacturing facility in Kiryat Gat, which consists of approximately 15,000 square
feet. The lease for the Kiryat Gat manufacturing facility expires on May 31, 2021, and we have an option to lease this facility for an additional three years. We
can terminate this lease by providing 180 days’ prior notice. The current utilization of the total production capacity at this facility would allow us to more than
double our current output at the facility by increasing the number of shifts on the existing production lines by hiring additional manufacturing personnel and
without requiring us to expand the physical structure of the facility. We have secured a location for a new, modern, manufacturing facility that we intend to
build in Kiryat Gat with the goal of increasing operational efficiency and providing for improved safety and security. Construction is currently expected to
begin in 2019 and to be completed by 2021. We currently expect to incur capital expenditures for the new facility in order to complete the acquisition of the
property and building of this facility.
Our U.S. offices are located in Mequon, Wisconsin, consisting of approximately 12,000 square feet. The lease for this office expires in June 2018.
We intend to relocate our US offices to Englewood, New Jersey. We have entered into a lease for our new headquarters in the United States, which is
comprised of approximately 15,845 square feet of offices and warehouse expiring in February 2028. The lease for this location expires in February 2028. We
intend to maintain a smaller office in Mequon following such relocation. We maintain additional sales, support and marketing offices in Dusseldorf, Hong
Kong, Shanghai and Florida.
ITEM 4A.
Unresolved Staff Comments.
None.
ITEM 5.
Operating and Financial Review and Prospects.
The information contained in this section should be read in conjunction with our financial statements for the year ended December 31, 2017 and
related notes and the information contained elsewhere in this annual report. Our financial statements have been prepared in accordance with U.S. GAAP.
This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. As a result of many factors, such as those
set forth under “ITEM 3.D. Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” our actual results may differ materially from
those anticipated in these forward-looking statements.
Overview
We develop, design and market innovative digital printing solutions for the global printed textile industry. Our vision is to revolutionize this industry
by facilitating the transition from analog processes that have not evolved for decades to digital methods of production that address contemporary supply,
demand and environmental dynamics. We focus on the rapidly growing high throughput DTG and R2R segments of the printed textile industry. Our solutions
include our proprietary digital printing systems, ink and other consumables, associated software and value added services that allow for large scale printing of
short runs of complex images and designs directly on finished garments and fabrics.
We have developed and offer a broad portfolio of differentiated digital printing solutions for the DTG market that provide answers to challenges
faced by participants in the global printed textile industry. Our DTG solutions utilize our patented wet-on-wet printing methodology that eliminates the
common practice of separately coating and drying textiles prior to printing. This methodology also enables printing on a wide range of untreated fabrics,
including cotton, wool, polyester, lycra and denim. Our patented NeoPigment ink and other consumables have been specially formulated to be compatible
with our systems and overcome the quality-related challenges that pigment-based inks have traditionally faced when used in digital printing. Our software
solutions simplify workflows in the printing process, by offering a complete solution from web order intake through graphic job preparation and execution.
43
Table of Contents
Building on the expertise and capabilities we have accumulated in developing and offering differentiated solutions for the DTG market, we market a
digital printing solution, the Allegro, targeting the R2R market. While the DTG market generally involves printing on finished garments, the R2R market is
focused on printing on fabrics that are subsequently converted into finished garments, home or office décor and other items. The Allegro utilizes our
proprietary wet-on-wet printing methodology and houses an integrated drying and curing system. We primarily market the Allegro to web-based businesses
that require a high degree of variety and limited quantity orders, as well as to fabric converters, which source large quantities of fabric and convert untreated
fabrics into finished materials to be sold to garment and home décor manufacturers. We believe that with the Allegro we are well positioned to take advantage
of the growing trend towards customized home décor. We began selling the Allegro commercially in the second quarter of 2015.
Our go to market strategy consists of a hybrid model of indirect and direct sales. We generate a significant portion of our sales through a global
network of independent distributors and value added resellers that we refer to as our channel partners. Our channel partners, in turn, sell the solutions they
purchase from us to customers for whom we provide installation services, or sell and install our solutions on their own. Our channel partners work closely
with our sales force and assist us by identifying potential sales targets, closing new business and maintaining relationships with and, in certain jurisdictions,
providing support directly to our customers.
Maintenance and support for our systems is performed either by our own service organization or by service engineers employed by our distributors.
This varies among the four regions that we currently serve, depending on the infrastructure we have established in each particular region. We provide
professional services directly to some of our customers in all regions. Our customers can renew maintenance and support contracts for additional periods by
purchasing a maintenance and support package that covers remote support, software upgrades and onsite yearly maintenance or they can choose to rely on our
support on a non-contractual time and material basis.
We have an attractive business model that results in recurring sales of ink and other consumables driven by our growing installed base of systems.
Our ink and other consumables are specially formulated to enable our systems to operate at the highest throughput level while adhering to high print quality
requirements.
We intend to capitalize on the continued growth of the DTG market by expanding our diverse global customer base, with particular focus on the fast-
growing web-to-print businesses. We also seek to increase our sales to existing customers, particularly sales of our ink and other consumables. At the same
time, we look to acquire new high-volume customers, which drives higher sales of ink and other consumables. We are also seeking to extend our serviceable
addressable market by introducing new features and functionality that enhance the capabilities of our systems and inks, and enable our systems to print on
new types of media. We plan to accomplish these goals by investing in our direct sales force, developing new applications for our systems, introducing new
solutions and growing our relationships with channel partners.
We were founded in 2002 in Israel and shipped our first system in 2005. As of December 31, 2017, we had 412 employees located across four
regions: Israel, the United States, Europe and the Asia Pacific region.
A. Operating Results
The information contained in this section should be read in conjunction with our audited financial statements for the years ended December 31,
2015, 2016 and 2017 and related notes and the information contained in ITEM 18. Financial Statements. Our financial statements have been prepared in
accordance with GAAP.
Components of Statement of Operations
Revenues
Systems, Ink and Other Consumables, Value Added Services
Substantially all of our revenues are generated from sales of our systems and ink and other consumables. Prior to 2017, we derived, and in the near
term we expect to continue to derive, a majority of our revenues from sales of our systems. However, in 2017, due to lower systems sales which resulted in
large part from the delay in receipt of permits for a new site for one of our large customers in the United States, we derived a larger portion of our revenues
from sales of ink and consumables. In the medium term, we are targeting an equal mix of revenues from our systems compared to ink and other consumable.
We do not consider the period to period change in our total installed base to be a helpful metric in assessing our performance because we currently sell a
number of different systems that have significantly different throughput characteristics and average selling prices. Accordingly, since we have not
experienced material changes in the prices at which we sell ink and other consumables, we believe the best measure of the success of our strategy is the
amount of the increase in revenues from ink and other consumables that is generated in each period.
44
Table of Contents
We generate the services portion of our revenues from the provision of spare parts to our distributors and customers, post-warranty service contracts,
value added services consisting of time and material based support and system upgrades.
We sell our products directly and through independent distributors who resell them to customers. Sales by our distributors accounted for
approximately 47% of our revenues in 2016 and approximately 49% of our revenues during 2017. On July 1, 2016, we completed the acquisition of the DTG
assets of one of our distributors in the United States, which increased our direct sales during 2016, however, our direct sales decreased in 2017 as we
strengthened our relationships with our distributors and added more distributors in the United States.
We recognize revenues from sales of our systems upon delivery, provided that all other revenue recognition criteria are met. In respect of sale of
systems with installation and training, we consider the installation and training to be not essential to the functionality of the systems. Therefore, we recognize
the revenues upon delivery in accordance with the agreed-upon delivery terms once all other revenue recognition criteria have been met. Revenues from
provision of value added services are generally recognized at the time such support services are provided.
We periodically provide customer incentive programs including product discounts, volume-based rebates and warrants, which are accounted for as
reductions to revenue in the period in which the revenue is recognized. These reductions to revenue are made based upon reasonable and reliable estimates
that are determined by historical experience and the specific terms and conditions of the incentive
See “—Critical Accounting Policies—Revenue Recognition”.
Geographic Breakdown of Revenues
The following table sets forth the geographic breakdown of revenues from sales to customers located in the regions indicated below for the periods
indicated:
U.S.
EMEA
Asia Pacific
Other
Total revenues
Shipping and handling
2015
2016
2017
$
%
$
%
$
%
(in thousands except percentages)
$
$
42,528
21,600
16,042
3,235
86,405
52.7% $
25.0
18.6
3.7
100.0% $
63,656
24,720
11,963
8,355
108,694
58.6% $
22.7
11.0
7.7
100.0% $
60,541
32,015
16,092
5,440
114,088
53.1%
28.1
14.1
4.7
100.0%
Shipping and handling fees that are charged to our customers are recognized as revenue in the period shipped and the related costs for providing
these services are recorded as a cost of revenues.
Cost of Revenues and Gross Profit
Cost of revenues consists primarily of payments to the third-party contract manufacturers who assemble our systems and who are responsible for
ordering most of the components for those systems. Cost of revenues also includes components for our systems for which we are responsible, such as print
heads, as well as raw materials for ink and other consumables. Cost of revenues includes personnel expenses, such as operation and supply chain employees,
and related overhead for the manufacturing of our systems, as well as expenses for service personnel involved in the installation and support of our systems,
shipping and handling fees and overhead for the manufacturing process of ink and other consumables. For 2016, cost of revenues also included the difference
between the higher carrying cost of the acquired inventory from a distributor purchased on July 1, 2016 which was recorded at fair value. We expect cost of
revenues to increase in absolute dollars due to increased revenues, but remain relatively constant or decrease as a percentage of total revenues, as we continue
to improve our manufacturing processes and supply chain and as the costs related to our service infrastructure, which have a fixed component, are leveraged
across a larger installed base.
45
Table of Contents
Gross profit is revenues less cost of revenues. Gross margin is gross profit expressed as a percentage of total revenues. Our gross margin has
historically fluctuated from period to period as a result of changes in the mix of the systems that we sell and the amount of revenues that we derive from ink
and other consumables versus systems. In general, we generate higher gross margins from our high throughput systems compared to entry level systems. In
addition, customers that purchase our high throughput systems generally use larger quantities of ink and other consumables, which generate higher margins
than sales of systems. We expect that gross margins will increase due to improvements in economies of scale and improvements in services gross margin.
We currently provide maintenance and support for all of our systems sold in the United States even if the sale is made through a distributor. We are
seeking to increase the number of customers that rely on us to provide maintenance and support for their systems by expanding our maintenance and support
capabilities. In addition to driving gross margin improvement, we believe this will provide an opportunity for direct contact with customers with the goal of
reducing system down-time, educating customers about optimal use of our systems to drive increased utilization, expanding the variety of print applications
and increasing sales of post-warranty service contracts and other professional application development services. Our service operations have not been
profitable on a standalone basis. We are seeking to generate greater revenues from our service offering, and thereby leverage the fixed cost component
associated with it, by increasing sales of post-warranty service contracts, selling upgrade kits and providing other professional services.
Operating Expenses
Our operating expenses are classified into three categories: research and development expenses, sales and marketing expenses, general and
administrative expenses and restructuring expenses. For each category, the largest component is generally personnel costs, consisting of salaries and related
personnel expenses, including share-based compensation expenses. Operating expenses also include allocated overhead costs for facilities, including rent
payments under our facility leases. We expect personnel and allocated costs to continue to increase at a controlled pace as we hire new employees to support
growth of our business, but at a slower pace than in prior years. In the long term, we expect operating expenses to decrease as a percentage of revenues.
Research and Development Expenses. The largest component of our research and development expenses is salaries and related personnel expenses
for our research and development employees. Research and development expenses also include purchases of laboratory supplies; expenses related to beta
testing of our systems; and allocated overhead costs for facilities, including rent payments under our facilities leases. We record all research and development
expenses as they are incurred. We expect research and development expenses to slightly increase in absolute terms as we continue to hire additional personnel
for the development of upgrades to existing systems and additional systems that we develop. Our current research and development efforts are primarily
focused on our next generation of R2R and DTG systems. We are also investing in the development of new ink formulas for our new systems and in order to
expand the range of fabrics on which we can print and further improve color quality and diversification of our high resolution images and designs.
Sales and Marketing Expenses. The largest component of our sales and marketing expenses is salaries and related personnel expenses for our
marketing, sales and other sales-support employees. Sales and marketing expenses also include trade shows, other advertising and promotions, including
distributor open houses and media advertising; sales-based commissions and allocated overhead costs for facilities, including rent payments under our
facilities leases. We market our solutions using a combination of internal marketing professionals and our network of channel partners. We expect sales and
marketing expenses to continue to increase in absolute terms in the near term as we add sales and marketing personnel, including as a part of strengthening
our relationships with our distributors.
General and Administrative Expenses. The largest component of our general and administrative expenses is salaries and related personnel expenses
for our executive officers, financial staff, information technology staff, and human resources staff. General and administrative costs also include fees for
accounting and legal services and allocated overhead costs for facilities, including rent payments under our facilities leases. We expect our general and
administrative expenses to increase in absolute terms in the near term, but at a slower pace than in prior years, as a result of additional personnel to support
our growth and the relocation of our U.S. headquarters from Mequon, Wisconsin to Englewood, New Jersey.
46
Table of Contents
Finance Income (expenses), Net
Finance income (expenses), net consists of interest income and foreign currency exchange gains or losses. Foreign currency exchange changes
reflect gains or losses related to changes in the value of our non-U.S. dollar denominated financial assets, primarily cash and cash equivalents, and trade
payables and receivables. As of December 31, 2017, we did not have any indebtedness for borrowed amounts. Interest income consists of interest earned on
our cash, cash equivalents, short-term bank deposits and marketable securities, offset by amortization of premium on marketable securities. We expect interest
income to vary depending on our average investment balances and market interest rates during each reporting period.
Taxes on Income
The corporate tax rate in Israel was 26.5% in 2015, 25% in 2016 and 24% in 2017. The corporate tax rate decreased to 23% beginning on January 1,
2018. However, as discussed in greater detail below under “Taxation and Israeli Government Programs Applicable To Our Company — Israeli Tax
Considerations and Government Programs,” we and our wholly-owned Israeli subsidiary Kornit Technologies, are entitled to various tax benefits under the
Israeli Law for the Encouragement of Capital Investments, 1959, or the Investment Law.
Starting from January 1, 2014, we consolidate the results of our Israeli operations for tax purposes such that net operating loss carryforwards of
Kornit Technologies generated from 2014 onwards can be used to offset Israeli taxable income from us. Kornit Technologies currently generates sufficient net
operating loss carryforwards to offset the taxable income of the parent. Accordingly, we were not subject to income tax in Israel in 2015, 2016 or 2017 and
our effective tax rate was the blended rate of our Israeli tax and those of our non-Israeli subsidiaries in their respective jurisdictions of organization.
Under the Investment Law and other Israeli legislation, we are entitled to certain additional tax benefits, including accelerated depreciation and
amortization rates for tax purposes on certain assets, deduction of public offering expenses in three equal annual installments and amortization of other
intangible property rights for tax purposes.
47
Table of Contents
Comparison of Period to Period Results of Operations
2015
Year Ended December 31,
2016
(in thousands)
2017
Revenues
Products
Services
Total revenues
Cost of revenues
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Restructuring expenses
Total operating expenses
Operating income (loss)
Finance income (expenses), net
Income (loss) before taxes on income
Taxes on income
Net income (loss)
Revenues
Products
Services
Total revenues
Cost of revenues
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Restructuring expenses
Total operating expenses
Operating income (loss)
Finance income (expenses), net
Income (loss) before taxes on income
Taxes on income
Net income (loss)
100,818 $
7,876
108,694
101,953
12,135
114,088
$
$
79,751 $
6,654
86,405
35,632
10,188
45,820
40,585
11,950
13,367
9,500
-
34,817
5,768
(334)
5,434
709
4,725 $
46,483
12,801
59,284
49,410
17,383
18,338
12,259
-
47,980
1,430
46
1,476
648
828 $
2015
Year Ended December 31,
2016
(as a % of revenues)
2017
92.3%
7.7
100
41.2
11.8
53.0
47.0
13.8
15.5
11.0
-
40.3
6.7
(0.4)
6.3
0.8
5.5%
92.8%
7.2
100
42.7
11.8
54.5
45.5
16.0
16.9
11.2
-
44.1
1.3
0.0
1.4
0.6
0.8%
46,480
13,497
59,977
54,111
20,834
21,279
13,578
503
56.194
(2,083)
452
(1,631)
384
(2,015)
89.4%
10.6
100
40.8
11.8
52.6
47.4
18.3
18.7
11.9
0.4
49.3
(1.8)
0.4
(1.4)
0.3
(1.8)%
Comparison of the Years Ended December 31, 2016 and 2017
Revenues
Revenues increased by $5.4 million, or 5.0%, to $114.1 million in 2017, which is net of $2.9 million fair value of the warrants associated with
revenues recognized from Amazon, from $108.7 million in 2016, which is net of $2.0 million fair value of the warrants associated with revenues recognized
from Amazon. The growth in revenues resulted from a 20.1% increase in ink and other consumables revenues to $51.5 million in 2017 from $42.8 million in
2016, a 54.1% increase in service revenues to $12.1 million in 2017 from $7.9 million in 2016 and a decrease of 12.9% in systems revenues from $58.0
million in 2016 to $50.5 million in 2017. The $8.7 million increase in ink and other consumables revenues was due to higher sales volumes of ink and other
consumables and our larger installed base. The $7.5 million decrease in systems revenues was attributable to lower system sales in 2017,particularly in North
America, with a significant impact coming from the delay in receipt of permits for a new site for one of our large customers in the US as well as longer sales
cycle s for our Vulcan platform. The increase in our services revenues was primarily due to an increase in sales of spare parts and service contracts to our
installed base as well as an increase in systems upgrades.
48
Table of Contents
Cost of Revenues and Gross Profit
Cost of revenues increased by $0.7 million, or 1.2%, to $60.0 million in 2017 from $59.3 million in 2016. Gross profit increased by $4.7 million, or 9.5%, to
$54.1 million in 2017, as compared to $49.4 million in 2016. Gross margin was 47.4% in 2017 compared to 45.5% in 2016. Gross margin increased as a
result of the shift in mix of revenues in favor of ink and consumables, which have a relatively higher gross margin percentage, from 39.4% of revenues in
2016 to 45.1% of revenues in 2017. The increase was also related to an increase in ink and consumables gross margin which resulted from economies of scale
and increased ink and consumables sales and an increase in services gross margin which resulted from an increase in sales of systems upgrades to our wider
install base and an increase in sales of service contracts. Such positive impact was offset by a decrease in systems gross margin which resulted from lower
systems sales in 2017 compared to 2016.
Operating Expenses
Operating expenses:
Research and development
Sales and marketing
General and administrative
Restructuring expenses
Total operating expenses
Year Ended December 31,
2016
Amount
% of
Revenues
2017
Change
Amount
% of
Revenues
($ in thousands)
Amount
%
$
$
17,383
18,338
12,259
-
47,980
16.0% $
16.9
11.3
-
44.2% $
20,834
21,279
13,578
503
56,194
18.3
18.7
11.9
0.4
49.3
3,451
2,941
1,319
503
8,214
19.9%
16.0
10.8
100
17.1%
Research and Development. Research and development expenses increased by 19.9% in 2017 compared to 2016. This resulted primarily from an
increase of $1.8 million in salaries and related personnel expenses and share based compensation due to the hiring of additional personnel in 2017 reflecting
an increase in headcount compared to 2016, an increase of $1.6 million in costs due to increased research and development activity, which primarily includes
$0.6 million in facilities costs in connection with the expansion of our headquarters in Rosh Ha’Ayin, Israel, and an increase of $1.0 million in expenses due
to depreciation expenses relating to leasehold improvements made and capital equipment acquired as part of the expansion of our research and development
capabilities. As a percentage of total revenues, our research and development expenses increased during this period from 16.0% in 2016 to 18.3% in 2017.
Sales and Marketing. Sales and marketing expenses increased by 16.0% in 2017 compared to 2016. This increase was primarily due to an increase of
$2.3 million in salaries and related personnel expenses and share based compensation expenses mainly due to a higher average number of employees during
2017 compared to 2016, higher cost per employee in 2017 increase in sales commission, and increase of $1.0 million in amortization of assets due to the
purchase of the digital direct to garment printing assets of SPSI in 2016. As a percentage of total revenues, our sales and marketing expenses increased during
this period from 16.9% in 2016 to 18.7% in 2017.
General and Administrative. General and administrative expenses increased by 10.8% in 2017 compared to 2016. This resulted primarily from an
increase of $1.9 million in salaries and related personnel expenses and share based compensation mainly due to the hiring of additional personnel reflecting
an increase in headcount, an increase of $0.3 million in expenses related to upgrades of our IT infrastructure and an increase of $0.2 million of facilities costs
due to expansion of our facilities. These increases were offset by a decrease of $0.5 million in acquisition related expense that occurred in 2016. As a
percentage of total revenues, our general and administrative expenses increased from 11.3% in 2016 to 11.9% in 2017.
49
Table of Contents
Restructuring Costs. During 2017, we determined to transition our US headquarters to New Jersey. As part of this transition, we entered into
agreements with certain employees for early retirement or retention. We recorded an expense of $0.5 million in 2017.
Finance Income (Expenses), Net
Finance income (expenses), net reflected income of $0.05 million in 2016 and an expense of $0.5 million in 2017. This change resulted primarily
from the effects of exchange rates on our non-dollar denominated financial assets, specifically the exchange rate of the U.S. dollar to the NIS offset by interest
accrued and received with respect to our cash investments and marketable securities in 2017.
Taxes on Income
Taxes on income decreased slightly from $0.6 million in 2016 to $0.4 million in 2017. The decrease is consisted of an increase in current tax in 2017
and a one-time expense for the change in deferred taxes in the U.S due to the new tax reform offset by the reversal of an accounting provision in the amount
of $0.6 million.
Comparison of the Years Ended December 31, 2015 and 2016
Revenues
Revenues increased by $22.3 million, or 25.8%, to $108.7 million in 2016 from $86.4 million in 2015. The growth in revenues resulted from a
27.2% increase in systems and services revenues to $65.9 million in 2016 from $51.8 million in 2015 and a 23.8% increase in sales of ink and other
consumables to $42.8 million in 2016 from $34.6 million in 2015. The $14.1 million growth in systems and services revenues was attributable to a change in
the mix of systems sold, specifically sales of higher throughput systems, which sell for higher average selling prices than our entry level systems, in 2016
compared to 2015. We believe that the increase in sales of high throughput systems was a result of the growing maturity of the web-to-print business model
which calls for high throughput systems to meet the growing consumer demand. The $8.2 million increase in ink and other consumables revenues was due to
higher sales volumes of ink and other consumables and our larger installed base. The improvements in system and services revenues and ink and consumables
revenues was offset by the fair value of warrants associated with revenues recognized from Amazon of $2.0 million.
Cost of Revenues and Gross Profit
Cost of revenues increased by $13.5 million, or 29.4%, to $59.3 million in 2016 from $45.8 million in 2015. Gross profit increased by $8.8 million,
or 21.7%, to $49.4 million in 2016, as compared to $40.6 million in 2015. Gross margin was 45.5% in 2016 compared to 47.0% in 2015. The decrease in
gross margin is related to an increase in systems and services gross margin which resulted from an increase in sales of higher margin high throughput systems,
economies of scale and an increase in sales of service contracts. While gross margin was positively impacted by an increase in sales of higher margin high
throughput systems and economies of scale during 2016 compared to 2015, such positive impact was offset by the impact of a non-recurring charge for the
repurchase of inventory in connection with the acquisition of the digital printing assets of SPSI during 2016 of $2.5 million and the fair value of the warrants
issued to Amazon of $2.0 million, which negatively affected gross profit and resulted in a slight decrease in gross margin. Ink and consumables gross margin
remained flat from 2015 to 2016.
50
Table of Contents
Operating Expenses
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Year Ended December 31,
2015
Amount
% of
Revenues
2016
Change
Amount
% of
Revenues
($ in thousands)
Amount
%
$
$
11,950
13,367
9,500
34,817
13.8% $
15.5
11.0
40.3% $
17,383
18,338
12,259
47,980
16.0
16.9
11.3
44.2
5,433
4,971
2,759
13,163
45.5%
37.2
29.0
37.7%
Research and Development. Research and development expenses increased by 45.5% in 2016 compared to 2015. This resulted primarily from an
increase of $3.3 million in salaries and related personnel expenses and share based compensation due to the hiring of additional personnel in 2016 reflecting
an increase in headcount compared to 2015, an increase of $1.3 million in costs due to increased research and development activity, which primarily includes
$0.7 million in facilities costs in connection with the expansion of our headquarters in Rosh Ha’Ayin, Israel, and an increase of $0.6 million in depreciation
due to the purchase of the digital direct to garment printing assets of SPSI in 2016. As a percentage of total revenues, our research and development expenses
increased during this period, from 13.8% in 2015 to 16.0% in 2016.
Sales and Marketing. Sales and marketing expenses increased by 37.2% in 2016 compared to 2015. This increase was primarily due to an increase of
$3.0 million in salaries and related personnel expenses and share based compensation expenses due to the hiring of sales and marketing personnel in 2016
reflecting an increase in headcount in 2016 compared to 2015, an increase of $0.7 million in marketing activities, including trade shows and online marketing
activities, an increase of $0.6 million in costs of shipping to subsidiaries and an increase of $0.5 million in amortization of assets due to the purchase of the
digital direct to garment printing assets of SPSI in 2016. As a percentage of total revenues, our sales and marketing expenses increased during this period
from 15.5% in 2015 to 16.9% in 2016.
General and Administrative. General and administrative expenses increased by 29.0% in 2016 compared to 2015. This resulted primarily from an
increase of $1.7 million in salaries and related personnel expenses and share based compensation due to the hiring of additional personnel reflecting an
increase in headcount and compensation to executives compared to 2015, an increase of $0.4 million in expenses related to upgrades of our IT infrastructure,
an increase of $0.3 million in legal expenses relating to settlement of a legal claim, an increase of $0.3 million in costs associated with being a publicly traded
company and an increase of $0.2 million of facilities costs due to expansion of our facilities. These increases were offset by a decrease of $0.8 million due to
a one-time payment in 2015 to Fortissimo Capital, our principal shareholder, in connection with the termination of our management services agreement with
them and a decrease of $0.2 million due to one-time bonuses in 2015 in connection with our initial public offering. As a percentage of total revenues, our
general and administrative expenses increased from 11.0% in 2015 to 11.2% in 2016.
Finance Income (Expenses), Net
Finance income (expenses), net reflected expenses of $0.3 million in 2015 and income of $0.05M in 2016. This change resulted primarily from
interest accrued and received with respect to our cash investments and marketable securities in 2016 offset by the effects of exchange rates on our non-dollar
denominated financial assets, specifically the exchange rate of the U.S. dollar to the NIS.
Taxes on Income
Taxes on income decreased slightly from $0.7 million in 2015 to $0.6 million in 2016.
51
Table of Contents
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP).
These accounting principles are more fully described in note 2 to our consolidated financial statements included elsewhere in this annual report and require us
to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can
affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during
the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial
statements will be affected. We believe that the accounting policies discussed below are critical to our financial results and to the understanding of our past
and future performance, as these policies relate to the more significant areas involving management’s estimates and assumptions. We consider an accounting
estimate to be critical if: (1) it requires us to make assumptions because information was not available at the time or it included matters that were highly
uncertain at the time we were making our estimate; and (2) changes in the estimate could have a material impact on our financial condition or results of
operations.
We believe that the following significant accounting policies are the basis for the most significant judgments and estimates used in the preparation of
our consolidated financial statements.
Revenue Recognition
We generate revenues from the sale of our systems, ink and other consumables and value added services. We generate revenues from sale of our
solutions directly to customers and indirectly through independent distributors. We recognize revenue when (1) persuasive evidence of a final agreement
exists, (2) delivery has occurred or services have been rendered, (3) the selling price is fixed or determinable, and (4) collectability is reasonably assured. We
recognize revenues from selling these products upon delivery, provided that all other revenue recognition criteria are met. In respect of sale of systems with
installation and training, we consider the installation and training to be not essential to the functionality of the systems. Therefore, we recognized in
accordance with the agreed-upon delivery terms once all other revenue recognition criteria have been met.
Revenues from service are derived mainly from the sale of print heads, spear parts and sale of service contracts. Print heads and spear parts revenues
are recognized upon delivery, provided that all other revenue recognition criteria are met. The service contracts are recognized ratably, on a straight-line basis,
over the period of the service.
We typically provide a one-year warranty on our systems. After the initial warranty period, we offer customers optional extended warranty contracts
ranging generally from one to three years. Revenues from extended warranties are recognized ratably, on a straight-line basis, over the period of the service.
Unearned revenues are derived mainly from these prepaid agreements. We classify the portion of unearned revenue not expected to be earned in the
subsequent 12 months as long-term.
We periodically provide customer incentive programs including product discounts, volume-based rebates and warrants, which are accounted for as
reductions to revenue in the period in which the revenue is recognized. These reductions to revenue are made based upon reasonable and reliable estimates
that are determined by historical experience and the specific terms and conditions of the incentive.
Revenues from ink and other consumable products are generally recognized upon shipment assuming all other revenue recognition criteria have been
met.
In cases in which old systems are traded in as part of sales of new printers, the fair value of the old printer is recorded as inventory, provided that
such value can be determined.
We assess collectability as part of the revenue recognition process. This assessment includes a number of factors such as an evaluation of the
creditworthiness of the customer, past due amounts, past payment history, and current economic conditions. If it is determined that collectability cannot be
reasonably assured, we defer recognition of revenue until collectability is assured.
52
Table of Contents
Inventories
Inventories are measured at the lower of cost or net realizable value. Cost is computed using weighted average cost, on a first-in, first-out basis.
Inventory costs consist of material, direct labor and overhead. We periodically assess inventory for obsolescence and excess and reduce the carrying value by
an amount equal to the difference between its cost and the estimated net realizable value based on assumptions about future demand and historical sales
patterns. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales
and expected recoverable values of each disposition category. These assumptions about future disposition of inventory are inherently uncertain and changes in
our estimates and assumptions may cause us to realize material write-downs in the future.
As of December 31, 2017, we had $34.9 million of inventory of which $15.8 million consisted of raw materials and components and $19.1 million
consisted of completed systems, ink and other consumables. We recorded inventory write-offs in a total amount of $0.8 million, $2.2 million and $3.0 million
for the years ended December 31, 2015, 2016 and 2017, respectively.
Share-Based Compensation
Under U.S. GAAP, we account for share-based compensation for employees in accordance with the provisions of the FASB’s ASC Topic 718
“Compensation—Stock Based Compensation,” or ASC 718, which requires us to measure the cost of options and RSU’s based on the fair value of the award
on the grant date.
The fair value of each RSU is the market value as determined by the closing share price at the date of the grant.
We selected the binomial option pricing model as the most appropriate method for determining the estimated fair value of options which requires the
use of subjective assumptions, including the expected term of the award and the expected volatility of the price of our common stock. We recognize
compensation expense over the vesting period using the straight-line method and classify these amounts in the consolidated financial statements based on the
department to which the related employee reports. We will continue to use judgment in evaluating the assumptions related to our share-based compensation
expense on a prospective basis. As we continue to accumulate additional data, we may have refinements to our estimates, which could materially impact our
future share-based compensation expense
Taxes
We are subject to income taxes principally in Israel and the United States. Significant judgment is required in evaluating our uncertain tax positions
and determining our provision for income taxes. We recognize income taxes under the liability method. Tax benefits are recognized from uncertain tax
positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the
technical merits of the position. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax
outcome of these matters will not be different. We adjust these reserves when facts and circumstances change, such as the closing of a tax audit, the
refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such
differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effects
of any reserves that are considered appropriate, as well as the related net interest and penalties.
We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets
and liabilities under U.S. GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We regularly review our
deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not
be realized. To make this judgment, we must make predictions of the amount and category of taxable income from various sources and weigh all available
positive and negative evidence about these possible sources of taxable income.
While we believe the resulting tax balances as of December 31, 2015, 2016 and 2017 are appropriately accounted for, the ultimate outcome of such
matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. We have filed or
are in the process of filing local and foreign tax returns that may be audited by the respective tax authorities. We believe that we adequately provided for any
reasonably foreseeable outcomes related to tax audits and settlement; however, our future results may include favorable or unfavorable adjustments to our
estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statute of limitations on potential assessments expire.
53
Table of Contents
Warranty costs
We typically grant a one-year warranty on our systems and record a provision for warranty at the time the product’s revenue is recognized. We
estimate the liability of possible warranty claims based on our historical experience. We estimate the costs that may be incurred under our warranty
arrangements and record a liability in the amount of such costs at the time product revenue is recognized. We periodically assess the adequacy of the recorded
warranty liabilities and adjust the amounts as necessary.
Marketable Securities
Marketable securities currently are comprised of debt securities. We determine the appropriate classification of marketable securities at the time of
purchase and re-evaluate such designation at each balance sheet date. In accordance with FASB ASC No. 320, “Investment Debt and Equity Securities,” we
classify marketable securities as available-for-sale. Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in
accumulated other comprehensive income (loss), a separate component of shareholders’ equity, net of taxes. Realized gains and losses on sales of marketable
securities, as determined on a specific identification basis, are included in finance income, net. The amortized cost of marketable securities is adjusted for
amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in finance income, net.
We recognize an impairment charge when a decline in the fair value of our investments in debt securities below the cost basis of such securities is
judged to be other-than-temporary. The determination of credit losses requires significant judgment and actual results may be materially different from our
estimates. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the
ability of the issuer to meet payment obligations, the potential recovery period and our intent to sell, including whether it is more likely than not that we will
be required to sell the investment before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment is
recognized in the statement of operations and is limited to the amount related to credit losses, while impairment related to other factors is recognized in other
comprehensive income (loss).
During the years ended December 31, 2016 and 2017, no other-than temporary impairment were recorded related to our marketable securities.
Recently Issued and Adopted Accounting Pronouncements
For a summary of recent accounting pronouncements applicable to our consolidated financial statements see Note 2, “Significant Accounting
Policies” to the Consolidated Financial Statements included in Part III, Item 18 of this Annual Report on Form 20-F.
Taxation and Israeli Government Programs Applicable to Our Company
Israeli Tax Considerations and Government Programs
The following is a brief summary of the material Israeli tax laws applicable to us, and certain Israeli Government programs that benefit us.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax on their taxable income. As of 2018, the corporate tax rate is 23% (in 2017, the corporate tax
rate was 24% and in 2016, the corporate tax rate was 25%). However, the effective tax rate payable by a company that derives income from a Preferred
Enterprise or a Benefited Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli company are subject to the prevailing
corporate tax rate.
54
Table of Contents
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several tax
benefits for “Industrial Companies.” We currently qualify as an Industrial Company within the meaning of the Industry Encouragement Law.
The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, which was incorporated in Israel and of which
90% or more of its income in any tax year, other than income from certain government loans, is derived from an “Industrial Enterprise” located in Israel and
owned by it. An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial production.
The following tax benefits, among others, are available to Industrial Companies:
● deduction of the cost of purchased know-how, patents and rights to use a patent and know-how which are used for the development or
promotion of the Industrial Enterprise, over an eight-year period commencing on the year in which such rights were first exercised;
● under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies controlled by it; and
● expenses related to a public offering are deductible in equal amounts over three years. , commencing in the year of the offering.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
There can be no assurance that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the
future.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives for
capital investments in production facilities (or other eligible assets) by “Industrial Enterprises” (as defined under the Investment Law).
The Investment Law has been amended several times over the recent years, with the three most significant changes effective as of April 1, 2005, or
the 2005 Amendment, as of January 1, 2011, or the 2011 Amendment and as of January 1, 2017, or the 2017 Amendment. Pursuant to the 2005 Amendment,
tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits
granted subsequently are subject to the provisions of the 2005 Amendment. Similarly, the 2011 Amendment introduced new benefits to replace those granted
in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment. However, companies entitled to benefits under the
Investment Law as in effect prior to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or
elect instead, irrevocably, to forego such benefits and have the benefits of the 2011 Amendment apply. We have examined the possible effect of these
provisions of the 2011 Amendment on our financial statements and have decided not to opt to apply the new benefits under the 2011 Amendment and the
2017 Amendment for our company, and for our Israeli subsidiary we elected to apply the benefit under the 2011 Amendment. The 2017 Amendment
introduces new benefits for Technological Enterprises, alongside the existing tax benefits.
55
Table of Contents
Tax Benefits Subsequent to the 2005 Amendment
The 2005 Amendment applies to new investment programs and investment programs commencing after 2004, but does not apply to investment
programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted
before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such
approval. Pursuant to the 2005 Amendment, the Israeli Authority for Investments and Development of the Industry and Economy, or the Investment Center,
will continue to grant Approved Enterprise status to qualifying investments. The 2005 Amendment, however, limits the scope of enterprises that may be
approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise.
The 2005 Amendment provides that Approved Enterprise status will only be necessary for receiving cash grants. As a result, it was no longer
necessary for a company to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternative
benefits track. Instead, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the
criteria for tax benefits set forth in the 2005 Amendment. Companies or programs under the new provisions receiving these tax benefits are referred to as
Benefited Enterprises. A company that has a Benefited Enterprise may, at its discretion, approach the Israel Tax Authority for a pre-ruling confirming that it is
in compliance with the provisions of the Investment Law, as amended.
Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities) which are generally required to derive more
than 25% of their business income from export to specific markets with a population of at least 14 million in 2012 (such export criteria will further be
increased in the future by 1.4% per annum). In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which
meets certain conditions set forth in the amendment for tax benefits, including exceeding a minimum investment amount specified in the Investment Law.
Such investment entitles a company to receive a “Benefited Enterprise” status with respect to the investment, and may be made over a period of no more than
three years from the end of the year in which the company requested to have the tax benefits apply to its Benefited Enterprise. Where a company requests to
have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered to be a Benefited Enterprise and the company’s
effective tax rate will be the weighted average of the applicable rates. In such case, the minimum investment required in order to qualify as a Benefited
Enterprise must exceed a certain percentage of the value of the company’s production assets before the expansion.
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise depends on, among other things,
the geographic location in Israel of the Benefited Enterprise. The location will also determine the period for which tax benefits are available. Such tax benefits
include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the
Benefited Enterprise in Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of
foreign investment in the company in each year. The benefits period is limited to 12 or 14 years from the year the company first chose to have the tax benefits
apply, depending on the location of the company.
A company qualifying for tax benefits under the 2005 Amendment which pays a dividend out of income derived by its Benefited Enterprise during
the tax exemption period will be subject to corporate tax in respect of the gross amount of the dividend distributed (grossed-up to reflect the pre-tax income
that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable. Dividends paid out of
income attributed to a Benefited Enterprise (or out of dividends received from a company whose income is attributed to a Benefited Enterprise) are generally
subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a
valid certificate from the Israel Tax Authority allowing for a reduced tax rate). The reduced rate of 15% is limited to dividends and distributions out of income
derived during the benefits period and actually paid at any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to
30%, or at a lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a
reduced tax rate). In the case of a Foreign Investors’ Company (as such term is defined in the Investment Law), the 12-year limitation on reduced withholding
tax on dividends does not apply.
The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a
company does not meet these conditions, it would be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and
interest, or other monetary penalties.
56
Table of Contents
We currently have Benefited Enterprise programs under the Investments Law, which, we believe, entitle us to a tax exemption for undistributed
income and a reduced tax rate. The benefits period for our company began in 2010. Our company is expected to enjoy these tax benefits until 2019. Our
subsidiary Kornit Technologies is subject to the 2011 Amendment (as described below) and thus the tax benefits will not be subject to time limitations.
Tax Benefits Under the 2011 Amendment
The 2011 Amendment canceled the availability of the benefits granted to companies in accordance with the provisions of the Investment Law prior
to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in
the Investment Law) as of January 1, 2011. The definition of a Preferred Company includes a company incorporated in Israel that is not wholly owned by a
governmental entity, and that has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011
Amendment, a Preferred Company is entitled to a reduced corporate flat tax rate of 15% with respect to its preferred income derived by its Preferred
Enterprise in 2011 and 2012, unless the Preferred Enterprise is located in a certain development zone, in which case the rate will be 10%. Such corporate tax
rate reduced to 12.5% and 7%, respectively, in 2013 and increased to 16% and 9% in 2014 and through 2016. Pursuant to the 2017 Amendment, in 2017 and
thereafter, the corporate tax rate for a Preferred Enterprise which is located in a specified development zone was decreased to 7.5%, while the reduced
corporate tax rate for other development zones remains 16%. Income derived by a Preferred Company from a ’Special Preferred Enterprise’ (as such term is
defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or to 5% if the Special Preferred
Enterprise is located in a certain development zone. As of January 1, 2017, the definition of “Special Preferred Enterprise” includes less stringent conditions.
Dividends paid out of preferred income attributed to a Preferred Enterprise or to a Special Preferred Enterprise are generally subject to withholding
tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from
the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld
(although, if subsequently distributed to individuals or a non-Israeli company, withholding of 20% or such lower rate as may be provided in an applicable tax
treaty will apply). In 2017 through 2019 dividends paid out of preferred income attributed to a Special Preferred Enterprise directly to a foreign parent
company are subject to withholding tax at source at the rate of 5% (temporary provisions).
The 2011 Amendment also provided transitional provisions to address companies already enjoying existing tax benefits under the Investment Law.
These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as
amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted
to an Approved Enterprise which chose to receive grants and certain tax benefits before the 2011 Amendment became effective will remain subject to the
provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; (ii) terms and benefits included in any certificate
of approval that was granted to an Approved Enterprise which had participated in an alternative benefits track before the 2011 Amendment became effective
will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a
Benefited Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain
conditions are met. Kornit Technologies has filed a notification that it wishes to apply the new benefits under the 2011 Amendment.
New Tax benefits under the 2017 Amendment that became effective on January 1, 2017.
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and is effective as of January
1, 2017, The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other
existing tax beneficial programs under the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology Enterprise” and will
thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income”, as defined in the Investment Law. The tax rate
is further reduced to 7.5% for a Preferred Technology Enterprise located in development zone A. These corporate tax rates shall apply only with respect to the
portion of intellectual property developed in Israel. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital
gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted
Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the
Innovation Authority.
57
Table of Contents
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred Technology
Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s geographic location
within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of
certain “Benefitted Intangible Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by an Israeli company or
acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from the Innovation Authority. A Special Preferred
Technology Enterprise that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for
at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income,
are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in
advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax
is required to be withheld. If such dividends are distributed to a foreign parent company holding at least 90% of the shares of the distributing company and
other conditions are met, the withholding tax rate will be 4%.
We qualify as a Preferred Technology Enterprise or Special Preferred Technology Enterprise, and we are considering whether to apply for benefits
under the 2017 Amendment.
From time to time, the Israeli Government has discussed reducing the benefits available to companies under the Investment Law. The termination or
substantial reduction of any of the benefits available under the Investment Law could materially increase our tax liabilities.
Foreign Tax Considerations
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which among other provisions, reduced the U.S. corporate tax rate
from 35% to 21%, effective January 1, 2018.
We have made reasonable estimates of the effects on the existing deferred tax balances as of December 31, 2017, for which provisional amounts
have been recorded. We re-measured certain of our U.S. deferred tax assets and liabilities, based on the rates at which we are expected to reverse in the future.
The estimated tax expense recorded related to the re-measurement of the deferred tax balance was $355.
B. Liquidity and Capital Resources
As of December 31, 2017, we had approximately $18.6 million in cash and cash equivalents, $4.5 million in short term deposits and $74.4 million in
marketable securities totaling $97.5 million. We fund our operations with cash generated from operating activities and cash raised during the IPO and the
secondary offering. In the past, we have also raised capital through the sale of equity securities to investors in private placements.
Our cash requirements have principally been for working capital, capital expenditures and acquisitions. Our working capital requirements reflect the
growth in our business. Historically, we have funded our working capital (primarily inventory and accounts receivables) and capital expenditures from cash
flows provided by our operating activities, investments in our equity securities and cash and cash equivalents on hand. We have funded our acquisitions from
the proceeds of our initial public offering and cash on hand. Our current capital expenditures relate primarily to investment in our new headquarters in the
United States and in our manufacturing facility for our ink and other consumables in Kiryat Gat, Israel. In addition to investments in those facilities, our
capital investments have included improvements and expansion of our worldwide locations and corporate facilities to support our growth and investment and
improvements in our information technology.
58
Table of Contents
The most significant elements of our working capital requirements are for inventory, accounts receivable and trade payables. We partially fund the
procurement of the components of our systems that are assembled by our third-party manufacturers. Our inventory strategy includes maintaining inventory of
systems and inks and other consumables at levels that we expect to sell during the successive months based on anticipated customer demand. Our accounts
receivable significantly decreased due to the improvement in our days sales’ outstanding, or DSO. Our trade payables decreased due to the decrease in sales
of systems.
As of December 31, 2017, the Company has two lines of credit with Israeli banks for total borrowings of up to $3 million, all of which was undrawn
as of December 31, 2017. These lines of credit are unsecured and available subject to the Company’s maintenance of a 30% ratio of total tangible
shareholders’ equity to total tangible assets and that the total credit use will be less than 70% of the Company and its subsidiaries’ receivables. Interest rates
across these credit lines varied from 0.2% to 2.3% as of December 31, 2017.
Based on our current business plans, we believe that our cash flows from operating activities and our existing cash resources will be sufficient to
fund our projected cash requirements for at least the next 12 months without drawing on our lines of credit or using significant amounts of the net proceeds
from our initial public offering or our follow-on offering. Our future capital requirements will depend on many factors, including our rate of revenue growth,
the timing and extent of spending to support product development efforts, the expansion of our sales and marketing activities, and the timing of introductions
of new solutions and the continuing market acceptance of our solutions as well as other business development efforts.
The following table presents the major components of net cash flows for the periods presented:
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Net Cash Provided by (Used in) Operating Activities
Year Ended December 31, 2017
2015
Year Ended December 31,
2016
(in thousands)
2017
$
(2,210) $
(58,871)
74,601
956 $
2,463
939
5,990
(46,744)
36,437
Net cash provided by operating activities in the year ended December 31, 2017 was $6.0 million.
Net cash provided by operating activities consisted of net loss of $2.0 million including 12 million from non-cash activities and a decrease of $9
million from accounts receivables due to lower revenues and higher payments received prior to the cutoff date. Our days sales’ outstanding, or DSO, for the
year ended December 31, 2017 was 74 compared to 106 for the year ended December 31, 2016.
During the period we had an increase of approximately $10.6 million in inventory from the year ended December 31, 2016 to the year ended
December 31, 2017. This was primarily due to our strategy of increasing inventory levels to meet anticipated customer demand for our solutions. We also
experienced a decrease of $3.6 million in trade payables due to a weaker fourth quarter 2017 compared to the fourth quarter of 2016.
59
Table of Contents
Year Ended December 31, 2016
Net cash provided by operating activities in the year ended December 31, 2016 was $1.0 million.
Net cash provided by operating activities consisted of net income of $0.8 million and an increase of approximately $6.1 million in inventory from the
year ended December 31, 2015 to the year ended December 31, 2016. This was primarily due to our strategy of increasing inventory levels to meet
anticipated customer demand for our solutions.
During the same period, we experienced an increase of $2.8 million in trade payables due to growth of our business and more favorable payment
terms from our suppliers. In addition, trade receivables increased by $9.3 million due primarily to the growth of our business and better payment terms to our
customers. Our days sales’ outstanding, or DSO, for the year ended December 31, 2016 was 106 compared to 95 for the year ended December 31, 2015 as a
result of such better payment terms to our customers.
Net Cash Provided by (Used in) Investing Activities
Net cash used in investing activities was $46.7 million for the year ended December 31, 2017, which was primarily attributable to our investment in
short term bank deposits and marketable securities. Net cash provided by investing activities was $2.5 million for the year ended December 31, 2016, which
was primarily attributable to our proceeds from short-term bank deposits of $22.0 million offset by our purchase of marketable securities of $11.5 million, our
investment in property and equipment of $5.5 million and $9.2 million paid in connection with our acquisition of SPSI.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $36.4 million for the year ended December 31, 2017, which was primarily attributable to our
secondary offering in which we have raised $35.1 million. Net cash provided by financing activities was $0.9 million for the year ended December 31, 2016,
which was attributable to the exercise of share options.
C. Research and development, patents and licenses, etc.
For a description of our research and development programs and the amounts that we have incurred over the last three years pursuant to those
programs, please see “ITEM 4.B Business Overview—Research and Development.”
D. Trend Information
Our results of operations and financial condition may be affected by various trends and factors discussed in “ITEM 3.D Risk Factors,” including “If
the market for digital textile printing does not develop as we anticipate, our sales may not grow as quickly as expected and our share price could decline.” and
“ITEM 4.B Business Overview—Industry,” changes in political, military or economic conditions in Israel and in the Middle East, general slowing of local or
global economies and decreased economic activity in one or more of our target markets.
E. Off-Balance Sheet Arrangements
We do not currently engage in off-balance sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable
interest entities, which includes special purposes entities and other structured finance entities.
60
Table of Contents
F. Tabular Disclosure of Contractual Obligations
Our contractual obligations as of December 31, 2017 are summarized in the following table:
Payments Due by Period
(in thousands)
Total
2018
2019
2020
2021
2022
Operating lease obligations (1)
Uncertain tax positions (2)
Purchase commitments (3)
Severance payment (4)
Total
$
$
16,640 $
670
16,475
1,232
35,017 $
2,504 $
2,494 $
2,465 $
2,195 $
2,088
16,475
18,819 $
2,330 $
2,296 $
2,195 $
2,088
2023
and
thereafter
4,894
-
-
-
4,894-
(1) Operating lease obligations consist of our contractual rental expenses under operating leases of facilities and vehicles.
(2) Consists of accruals for certain income tax positions under ASC 740 that are paid upon settlement, and for which we are unable to reasonably estimate
the ultimate amount and timing of settlement. See Note 13(h) to our consolidated financial statements included in ITEM 18 of this annual report for
further information regarding our liability under ASC 740. Payment of these obligations would result from settlements with tax authorities. Due to the
difficulty in determining the timing of resolution of audits, these obligations are only presented in their total amount.
(3) Consists of all open PO commitments through the end of 2018.
(4) Severance payments of $1.23 million are payable only upon termination, retirement or death of our employees. Of this amount, $0.7 million is unfunded
as of December 31, 2017. Since we are unable to reasonably estimate the timing of settlement, the timing of such payments is not specified in the table.
See also Note 2(w) to our consolidated financial statements appearing included in “ITEM 18 Financial Statements” of this annual report.
ITEM 6.
Directors, Senior Management and Employees.
A. Directors and Senior Management
The following table sets forth the name, age and position of each of our executive officers and directors as of the date of this annual report:
Name
Executive Officers
Gabi Seligsohn
Nuriel Amir
Guy Avidan
Gilad Yron
Directors
Yuval Cohen
Gabi Seligsohn
Ofer Ben-Zur
Eli Blatt
Lauri Hanover(1)(2)(3)(4)
Marc Lesnick
Alon Lumbroso(3)
Jerry Mandel(1)(2)(3)(4)
Dov Ofer(1)(2)(3)
Position
Age
51
50
55
45
55
51
53
55
58
51
60
53
64
Chief Executive Officer and Director
Chief Technology Officer
Chief Financial Officer
Executive Vice President of Global Business
Chairman of the Board of Directors
Chief Executive Officer and Director
Director
Director
Director
Director
Director
Director
Director
(1) Member of our audit committee.
(2) Member of our compensation committee.
(3) Independent director under the NASDAQ Stock Market rules.
(4) Serves as an external director under the Israeli Companies Law.
61
Table of Contents
Executive Officers
Gabi Seligsohn has served as a member of our board of directors since March 2015 and has served as our Chief Executive Officer since April 2014.
From August 2006 until August 2013, Mr. Seligsohn served as the President and Chief Executive Officer of Nova Measuring Instruments Ltd., (“Nova”)
(NASDAQ: NVMI), a designer, developer and producer of optical metrology solutions. From 1998 until 2006, Mr. Seligsohn served in several key positions
in Nova, including Executive Vice President of the Global Business Management Group from August 2005 to August 2006. From August 2002 until August
2005, he served as President of Nova’s U.S. subsidiary, Nova Measuring Instruments Inc. Additionally, prior to August 2002, Mr. Seligsohn was Vice
President Strategic Business Development of Nova Measuring Instruments Inc. where he established Nova’s OEM group and managed the Applied Materials
and Lam Research accounts between 2000 and 2002. From 1998 until 2000, he served as Global Strategic Account Manager for Nova’s five leading
customers. Mr. Seligsohn joined Nova after serving two years as Sales Manager for key financial accounts at Digital Equipment Corporation. Currently, Mr.
Seligsohn serves as a director of DSP Group Inc. (NASDAQ: DSPG). In 2010, he was voted Chief Executive Officer of the year by the Israeli Institute of
Management for hi-tech industries in the large company category. He holds an LL.B. from the University of Reading in Reading, England.
Nuriel Amir has served as our Chief Technology Officer since July 2016. From 2012 until mid-2016, Dr. Amir served as the Tech director of KLA-
Tencor, focusing on application development and marketing. From 2008 until 2012, Dr. Amir served as the R&D director for Numonyx B.V. and Micron
Technology, Inc. (NASDAQ: MU), leading the technology development and transfer to production of 45nm flash NOR technology. From 1977 until 2008, Dr.
Amir served in several positions at Intel in Israel and the U.S. in the fields of: R&D, transfer to production, Process Integration, Yield, Device, Labs and
Quality and Reliability, culminating as Yield department manager. Dr. Amir holds a Ph.D. from the microelectronic research center at the Electrical
Engineering Faculty at the Technion, and has taught at several universities and colleges. Dr. Amir has 20 patent applications and over 40 publications
including talks in the Society of Photo-Optical Instrumentation Engineers International, or SPIE.
Guy Avidan has served as our Chief Financial Officer since September 2014. From July 2010 until November 2014, Mr. Avidan served as Vice
President of Finance and Chief Financial Officer of AudioCodes Ltd. (“AudioCodes”) (NASDAQ: AUDC). Prior to joining AudioCodes, Mr. Avidan served
for 15 years in various managerial positions, including Co-President, at MRV Communications Inc. (NASDAQ: MRVC), a global provider of optical
communications network infrastructure equipment and services. While at MRV Communications, he served as Chief Financial Officer between 2007 and
2009, Vice President and General Manager of MRV International from 2001 to 2007. From 1992 to 1995, Mr. Avidan served as Vice President of Finance and
Chief Financial Officer of Ace North Hills, which was acquired by MRV Communications. Mr. Avidan is a CPA in Israel and holds a B.A. in Economics and
Accounting from Haifa University in Israel.
Gilad Yron has served as our Executive Vice President of Global Business since May 2016. From February 2015 until April 2016, Mr. Yron served
as Senior Vice President of Products at Stratasys, Ltd. (NASDAQ: SSYS). His previous positions with Stratasys included VP Business Development and
strategic alliances and Managing Director of Asia Pacific and Japan operating out of Hong Kong. From 2006 until 2010, Mr. Yron served in various positions
for Nur Macroprinters, which later became part of HP, including Business Manager for the Asia-Pacific region and Service Director. Mr. Yron holds a Bs.C.
in Physics from Tel Aviv University.
Directors
Yuval Cohen has served as the Chairman of our board of directors since August 2011. Mr. Cohen is the founding and managing partner of Fortissimo
Capital, a private equity fund established in 2004 and our controlling shareholder. From 1997 through 2002, Mr. Cohen was a General Partner at Jerusalem
Venture Partners (“JVP”), an Israeli-based venture capital fund, where he led investments in, and served on the boards of directors of, several portfolio
companies. Prior to joining JVP, he held executive positions at various Silicon Valley companies, including DSP Group, Inc. (NASDAQ: DSPG), and Intel
Corporation (NASDAQ: INTC). Currently, Mr. Cohen serves as a director of Wix.com Ltd. (NASDAQ: WIX). He also serves on the board of directors of
several privately held portfolio companies of Fortissimo Capital. Mr. Cohen holds a B.Sc. in Industrial Engineering from Tel Aviv University in Israel and an
M.B.A. from Harvard Business School in Massachusetts.
62
Table of Contents
Ofer Ben-Zur is a co-founder of our company and has served as director since 2002. From April 2014 to July 2016, Mr. Ben-Zur served as our
President and Chief Technology Officer. From 2002 to April 2014, Mr. Ben-Zur served as our Chief Executive Officer, as well as the manager of our
department of research and development. Prior to establishing our company, Mr. Ben-Zur worked as a consultant for several companies in the inkjet and
semi-conductor industries. From March 1998 until November 1999, Mr. Ben-Zur led a development team at Idanit — Scitex, a world leader in wide format
printers. From 1993 to 1998, he worked as a mechanical development engineer at Applied-Materials (NASDAQ: AMAT). Mr. Ben-Zur holds a B.Sc. in
Mechanical Engineering from the Technion — Israel Institute of Technology in Israel, an M.Sc. in Mechanical Engineering from Tel Aviv University in
Israel, and an M.B.A. from Bradford University in England.
Eli Blatt has served as a member of our board of directors since August 2011. Mr. Blatt joined Fortissimo Capital in 2004. From March 1999 to May
2004, Mr. Blatt worked at Noosh, Inc., a provider of cloud-based integrated project and procurement solutions, serving as its Chief Financial Officer from
2002 to 2004 and Vice President of Operations from 1999 to 2002. From 1997 to 1999, Mr. Blatt served as Director of Operations for CheckPoint Software
Technologies Inc. (NASDAQ: CHKP), an internet security company. Currently, Mr. Blatt serves on the board of directors of RadView Software Ltd.
(NASDAQ: RDVW) and several privately held portfolio companies of Fortissimo Capital. Mr. Blatt holds a B.Sc. in Industrial Engineering from Tel Aviv
University in Israel and an M.B.A. from Indiana University in Indiana.
Lauri Hanover has served as a member of our board of directors since March 2015 and is an external director under the Companies Law, the
chairperson of our audit committee and a member of our compensation committee. Ms. Hanover has served as the Senior Vice President and Chief Financial
Officer of Netafim Ltd., a global leader in smart irrigation systems, since August 2013. From 2009 to 2013, she served as Chief Financial Officer and
Executive Vice President of the Tnuva Group, Israel’s largest food manufacturer. From 2008 to 2009, Ms. Hanover served as Chief Executive Officer of
Gross, Kleinhendler, Hodak, Halevy and Greenberg & Co., an Israeli law firm. From 2004 to 2007, she served as Chief Financial Officer and Senior Vice
President of Lumenis Ltd. (NASDAQ: LMNS), a medical laser device company. From 2000 to 2004, Ms. Hanover served as the Chief Financial Officer and
Corporate Vice President of NICE Systems Ltd. (NASDAQ: NICE), an interaction analytics company, and from 1997 to 2000, as Chief Financial Officer and
Executive Vice President of Sapiens International Corporation N.V. (NASDAQ: SPNS), a provider of software solutions for the insurance industry. From
1981 to 2007, she served in a variety of financial management positions, including Corporate Controller and Director of Corporate Budgeting and Financial
Analysis at Scitex Corporation Ltd., a developer and manufacturer of inkjet printers, and Senior Financial Analyst at Philip Morris Inc. (Altria), a leading
consumer goods manufacturer. Currently, Ms. Hanover serves as a director and chairman of the audit and compensation committees of SodaStream
International Ltd (NASDAQ: SODA). Ms. Hanover holds a B.A. from the University of Pennsylvania, a B.S. in Economics from The Wharton School of the
University of Pennsylvania, as well as an M.B.A. from New York University.
Marc Lesnick has served as a member of our board of directors since August 2011. Mr. Lesnick joined Fortissimo Capital in 2004. From 2001
through 2003 prior to joining Fortissimo Capital, Mr. Lesnick served as an independent consultant to various high tech companies and institutional investors.
From 1997 to 2001, Mr. Lesnick served as the Managing Director of Jerusalem Global, a boutique investment bank based in Israel, and its affiliated entities.
From 1992 to 1997 prior to joining Jerusalem Global, Mr. Lesnick was an attorney at Weil, Gotshal & Manges LLP in New York, where he focused on public
offerings and mergers and acquisitions. Currently, Mr. Lesnick serves on the board of directors of several privately held portfolio companies of Fortissimo
Capital. Mr. Lesnick received a B.A. in Economics from Yeshiva University in New York and a J.D. from the University of Pennsylvania in Pennsylvania.
63
Table of Contents
Alon Lumbroso has served as a member of our board of directors since March 2015. Since June 2015, Mr. Lumbroso has been the chief executive
officer of DipTech Ltd. From January 2014 until March 2015, Mr. Lumbroso was a founder and partner of WebUP, an internet enterprise established in 2014
that acquires and manages internet sites. From 2011 to 2014, Mr. Lumbroso served as President of Mul-T-Lock Ltd., a subsidiary of ASSA ABLOY, a global
supplier of locks and security solutions, as well as Market Region Manager of ASSA ABLOY. From 2005 to 2011, he served as Chief Executive Officer and
director of Larotec Ltd., a developer and manufacturer of web-based end-to-end solutions. In addition, from 2004 to 2012, Mr. Lumbroso served as Chairman
of BioExplorers Ltd., a developer of homeland security systems for the detection of explosives. From 2003 to 2004, he served as Chief Executive Officer of
MindGuard, a developer and producer of medical devices. From 2000 to 2003, he served as Managing Director of Creo Europe (now CreoEMEA and
formerly CreoScitex), a manufacturer and supplier of digital presses and printers. In addition, from 1998 to 2000, Mr. Lumbroso served as Managing
Directors of Scitex and CreoScitex Asia Pacific, Hong Kong. Currently, he serves as a partner and director of iCar 2007 Ltd. Mr. Lumbroso holds a B.Sc. in
Industrial Engineering from Tel Aviv University in Israel and an M.B.A. from Bar-Ilan University in Israel.
Jerry Mandel has served as a member of our board of directors since March 2015 and is an external director under the Companies Law, chairman of
our compensation committee and a member of our audit committee. Mr. Mandel is the owner and CEO of Galil Capital Finance Ltd., a privately held
company that provides financial advisory and investment management services. Mr. Mandel is the owner of GC Nadlan Reals Estate SL, a Spanish company
specialized in providing investment management services in the real estate industry in Spain and serve as the Chairman of the Board of Galil Capital RE
Spain SOCIMI S.A. Mr. Mandel is also the founder, Chief Executive Officer, and managing member of GC Florida Group, a group of partnerships
established in 2009 that invests in and manages residential and commercial properties. From 2007 to 2009, he served as Chief Executive Officer and a
director of GMF Ltd., an investment firm that provided mezzanine financing to middle-market companies. From 2005 to 2008, Mr. Mandel served as a
director for Chen Yahav, the pension funds arm of Bank Yahav, and from 2004 to 2005, he served as a director and audit committee member of Cellcom Israel
Ltd., a leading Israeli cellular company. From 1998 to 2003, Mr. Mandel was the Director of Investment Banking of EEMEA for Merrill Lynch & Co. and
responsible for the origination and execution of investment banking activities in Israel. Currently, Mr. Mandel serves as a director and audit committee
member of Direct Insurance — Financial Investments Ltd. (TASE: DIFI). Mr. Mandel holds a B.Sc. in Industrial Engineering from Tel Aviv University in
Israel and an M.B.A. from Columbia Business School in New York.
Dov Ofer has served as a member of our board of directors since March 2015 and is a member of our audit and compensation committees. From
2007 to 2013, Mr. Ofer served as Chief Executive Officer of Lumenis Ltd. (NASDAQ: LMNS), a medical laser device company. From 2005 to 2007, he
served as Corporate Vice President and General Manager of HP Scitex (formerly a subsidiary of Scailex Corporation Ltd. (TASE: SCIX)), a producer of large
format printing equipment. From 2002 to 2005, Mr. Ofer served as President and Chief Executive Officer of Scitex Vision Ltd. Prior to joining Scitex, Mr.
Ofer held various managerial positions in the emerging Israeli high tech sector and participated in different mergers and acquisitions within the industry.
Currently, Mr. Ofer serves as chairman of Magen Eco-Energy RCA Ltd., chairman of Plastopil Hazorea Company Ltd. (TASE: PPIL), vice chairman of
Scodix Ltd. and director of Gauzy Ltd and Stratasys Ltd. (Nasdaq: SSYS). He holds a B.A. in Economics from the Hebrew University in Israel as well as an
M.B.A. from the University of California Berkeley in California.
Arrangements Concerning Election of Directors; Family Relationships
Our board of directors consists of nine directors. We are not a party to, and are not aware of, any voting agreements among our shareholders. In
addition, there are no family relationships among our executive officers or senior management members.
B. Compensation
The aggregate compensation paid and equity-based compensation and other compensation expensed by us and our subsidiaries to our directors and
executive officers with respect to the year ended December 31, 2017 was $4.4 million. This amount includes approximately $0.4 million set aside or accrued
to provide pension, severance, retirement or similar benefits or expenses. As of December 31, 2017, options to purchase 1,163,124 ordinary shares and 15,556
RSU’s granted to our directors and executive officers were outstanding under our share incentive plans at a weighted average exercise price of $8.95 per share
for the options. Certain of our officers and directors receive a severance payment of up to six months of their base salary upon termination of their
employment.
64
Table of Contents
The following table presents the grant dates, number of options, related exercise prices and expiration dates of options granted to our directors and
executive officers for the year ended December 31, 2017:
Grant Date
August 9, 2017
September 28, 2017
Director Compensation
Number of Options
Number of RSUs
60,000
120,000
10,000
-
Exercise Price
of Options
Expiration Date
of Options
August 9, 2027
September 28, 2027
18.05
15.05
Under the Companies Law, the compensation of our directors (including reimbursement of expenses) requires the approval of our compensation
committee, the subsequent approval of the board of directors and, unless exempted under the regulations promulgated under the Companies Law, the approval
of the shareholders at a general meeting as described in “C. Board Practices—Approval of Related Party Transactions under Israeli Law — Disclosure of
Personal Interests of an Office Holder and Approval of Certain Transactions.” Where the director is also a controlling shareholder, the requirements for
approval of transactions with controlling shareholders apply, as described below under “—Approval of Related Party Transactions under Israeli Law —
Disclosure of Personal Interests of a Controlling Shareholder and Approval of Certain Transactions.”
Our directors are entitled to cash compensation as follows:
All of our non-employee directors receive annual fees and per-meeting fees for their service on our board and its committees as follows:
● annual fees in the amount of $24,000 and $30,000 for the chairman; and
● per-meeting fees in the amount of $1,000 or $500 for participation in meetings via phone.
Executive Officer Compensation
The table below outlines the compensation granted to our five most highly compensated office holders during or with respect to the year ended
December 31, 2017, in the disclosure format of Regulation 21 of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970. We refer to the
five individuals for whom disclosure is provided herein as our “Covered Executives.”
For purposes of the table and the summary below, and in accordance with the above mentioned securities regulations, “compensation” includes base
salary, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits and any
undertaking to provide such compensation.
65
Table of Contents
Summary Compensation Table
s
Name and Principal Position(2)
Gabi Seligsohn, Chief Executive Officer
Guy Avidan, Chief Financial Officer
Gilad Yron, EVP Global Business
Nuriel Amir, Chief Technology Officer
Ofer Sandelson, former Chief Operating Officer
Information Regarding the Covered Executive(1)
Base
Salary
($)
Benefits
and
Perquisites
($)(3)
Variable
compensation
($)(4)
(in thousands)
Equity-Based
Compensation
($)(5)
Total
($)
367
203
202
220
174
76
67
66
71
83
150
53
44
36
-
1,004
312
181
110
110
1,613
623
516
359
367
(1) All amounts reported in the table are in terms of cost to us, as recorded in our financial statements.
(2) All current executive officers listed in the table are our full-time employees. Cash compensation amounts denominated in currencies other than the U.S.
dollar were converted into U.S. dollars at the average conversion rate for 2017.
(3) 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 to the executive, payments, contributions and/or allocations for savings funds, pension, severance, vacation, car or car
allowance, medical insurances and benefits, risk insurances (e.g., life, disability, accident), convalescence pay, payments for social security, tax gross-up
payments and other benefits and perquisites consistent with our guidelines.
(4) Amounts reported in this column refer to incentive and bonus payments which were paid with respect to 2017.
(5) Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2017 with respect to equity-
based compensation. Assumptions and key variables used in the calculation of such amounts are described in paragraph (r) of Note 2 to our audited
financial statements, which are included in “ITEM 18 Financial Reports” of this annual report.
2004 Share Option Plan
In May 2004 our board of directors adopted and our shareholders approved our 2004 Share Option Plan, or the 2004 Plan. The 2004 Plan was
amended on June 15, 2005. We are no longer granting options under the 2004 Plan because it was superseded by the 2012 Plan, although previously granted
awards remain outstanding. As of December 31, 2017 we had options to purchase 38,734 ordinary shares outstanding under the 2004 Plan.
The 2004 Plan provides for the grant of options to our and our subsidiaries’ and affiliates’ directors, employees and officers, who are expected to
contribute to our future growth and success.
The 2004 Plan is administered by our board of directors or by a compensation committee appointed by the board of directors, which determines,
subject to Israeli law, the grantees of awards and the terms of the grant, including, exercise prices, vesting schedules, acceleration of vesting and the other
matters necessary in the administration of the 2004 Plan. The 2004 Plan enabled us to issue awards under various tax regimes, including, without limitation,
pursuant to Section 102 of the Israeli Income Tax Ordinance (New Version) 1961, or the Ordinance.
Section 102 of the Ordinance allows employees, directors and officers, who are not controlling shareholders, to receive favorable tax treatment for
compensation in the form of shares or options. Section 102 of the Ordinance includes two alternatives for tax treatment involving the issuance of options or
shares to a trustee for the benefit of the grantees and also includes an additional alternative for the issuance of options or shares directly to the grantee. Section
102(b)(2) of the Ordinance, which provides the most favorable tax treatment for grantees, permits the issuance to a trustee under the “capital gain track.” Note
however, that according to Section 102(b)(3) of the Ordinance, if the company granting the shares or options is a publicly traded company or is listed for
trading on any stock exchange within a period of 90 days from the date of grant, any difference between the exercise price of the Awards (if any) and the
average closing price of the company’s shares at the 30 trading days preceding the grant date (when the company is listed on a stock exchange) or 30 trading
days following the listing of the company, as applicable, will be taxed as “ordinary income” at the grantee’s marginal tax rate. In order to comply with the
terms of the capital gain track, all securities granted under a specific plan and subject to the provisions of Section 102 of the Ordinance, as well as the shares
issued upon exercise of such securities and other shares received following any realization of rights with respect to such securities, such as share dividends
and share splits, must be registered in the name of a trustee selected by the board of directors and held in trust for the benefit of the relevant grantee. The
trustee may not release these securities to the relevant grantee before 24 months from the date of grant and deposit of such securities with the trustee.
However, under this track, we are not allowed to deduct an expense with respect to the issuance of the options or shares.
66
Table of Contents
Vesting schedule of options granted under the 2004 Plan is set forth in each grantee’s grant letter.
Options currently outstanding under the 2004 Plan may be exercised up to seven years from the grant date. In the event of the death of a grantee
while employed or engaged by us, or the termination of a grantee’s employment or services for reasons of disability or termination of a grantee’s employment
of services for reason of retirement in accordance with applicable law, the grantee, or in the case of death, his or her legal successor, may exercise options that
have vested prior to termination until the earlier of: (i) a period of one (1) year from the date of disability, retirement or death, or (ii) the term of the options. If
we terminate a grantee’s employment or service for cause, all of the grantee’s vested and unvested options will expire on the date of termination. If a grantee’s
employment or service is terminated for any other reason, the grantee may generally exercise his or her vested options within the earlier of: (a) 90 days after
the date of termination, or (b) the term of the options.
Options may not be sold, assigned, pledged or otherwise disposed of by the participant who holds such options, except by will or the laws of descent.
In the event of a merger or consolidation of our company, or a sale of all, or substantially all, of our shares or assets or other transaction having a
similar effect on us, then without the consent of the option holder, our board of directors or its designated committee, as applicable, shall decide (i) if and how
unvested options shall be canceled, replaced or accelerated, (ii) if and how vested options shall be exercised, replaced and/or sold by the trustee or the
company on behalf of the option holder, and (iii) how the underlying shares issued upon exercise of options and held by the trustee on behalf of the option
holder shall be replaced and/or sold by the trustee on behalf of the option holder.
2012 Share Incentive Plan
In October 2012, our board of directors adopted and our shareholders approved our 2012 Share Incentive Plan, or the 2012 Plan. The 2012 Plan
replaced our 2004 Plan. We are no longer granting options under the 2012 Plan because it was superseded by the 2015 Plan, although previously granted
awards remain outstanding. The 2012 Plan provides for the grant of options, restricted shares, restricted share units and other share-based awards to our and
our subsidiaries’ and affiliates’ directors, employees, officers, consultants, advisors, and any other person whose services are considered valuable to us or our
affiliates, to continue as service providers, to increase their efforts on our behalf or on behalf of our subsidiary or affiliate and to promote the success of our
business. As of December 31, 2017, we had options to purchase 657,664 ordinary shares outstanding under the 2012 Plan.
The 2012 Plan is administered by our board of directors or by a committee designated by the board of directors, which determines, subject to Israeli
law, the grantees of awards and the terms of the grant, including, exercise prices, vesting schedules, acceleration of vesting and the other matters necessary in
the administration of the 2012 Plan. The 2012 Plan enables us to issue awards under various tax regimes, including, without limitation, pursuant to Section
102 of the Ordinance as discussed under “2004 Share Option Plan” above, and under Section 3(i) of the Ordinance and Section 422 of the United States
Internal Revenue Code of 1986, as amended, or the Code.
The 2012 Plan provides that options granted to our employees, directors and officers who are not controlling shareholders and who are considered
Israeli residents are intended to qualify for special tax treatment under the “capital gain track” provisions of Section 102(b) of the Ordinance. Our Israeli non-
employee service providers and controlling shareholders may only be granted options under Section 3(i) of the Ordinance, which does not provide for similar
tax benefits.
Options granted under the 2012 Plan to U.S. residents may qualify as “incentive stock options” within the meaning of Section 422 of the Code, or
may be non-qualified. The exercise price for “incentive stock options” must not be less than the fair market value on the date on which an option is granted,
or 110% of the fair market value if the option holder holds more than 10% of our share capital.
67
Table of Contents
Options granted under the 2012 Plan generally vest over four years commencing on the date of grant, such that 50% vest on the second anniversary
of the date of grant and an additional 25% vest at the end of each subsequent anniversary, provided that the participant remains continuously employed or
engaged by us. In some cases, 25% vest on the first anniversary of the date of grant and an additional 6.25% vest at the end of each subsequent quarter,
provided that the participant remains continuously employed by or engaged by us.
Options, other than certain incentive share options, that are not exercised within seven years from the grant date expire, unless otherwise determined
by our board of directors or its designated committee, as applicable. Share options that qualify as “incentive stock options” and are granted to a person
holding more than 10% of our voting power will expire within five years from the date of the grant. In the event of the death of a grantee while employed by
or performing service for us or a subsidiary or within three months after the date of the employee’s termination, or the termination of a grantee’s employment
or services for reasons of disability, the grantee, or in the case of death, his or her legal successor, may exercise options that have vested prior to termination
within a period of one year from the date of disability or death. If a grantee’s employment or service is terminated by reason of retirement in accordance with
applicable law, the grantee may exercise his or her vested options within the three month period after the date of such retirement. If we terminate a grantee’s
employment or service for cause, all of the grantee’s vested and unvested options will expire on the date of termination. If a grantee’s employment or service
is terminated for any other reason, the grantee may generally exercise his or her vested options within 90 days of the date of termination. Any expired or
unvested options return to the pool and become available for reissuance.
In the event of a merger or consolidation of our company, or a sale of all, or substantially all, of our shares or assets or other transaction having a
similar effect on us, then without the consent of the option holder, our board of directors or its designated committee, as applicable, may but is not required to
(i) cause any outstanding award to be assumed or an equivalent award to be substituted by such successor corporation, or (ii) in case the successor corporation
does not assume or substitute the award (a) provide the grantee with the option to exercise the award as to all or part of the shares or (b) cancel the options
and pay in cash an amount determined by the board of directors or the committee as fair in the circumstances. Notwithstanding the foregoing, our board of
directors or its designated committee may upon such event amend, modify or terminate the terms of any award, including conferring the right to purchase any
other security or asset that the board of directors or the committee shall deem, in good faith, appropriate.
2015 Incentive Compensation Plan
In March 2015, we adopted our 2015 Incentive Compensation Plan, or the 2015 Plan. The 2015 Plan provides for the grant of share options, share
appreciation rights, restricted share awards, restricted share units, cash-based awards, other share-based awards and dividend equivalents to our company’s
and our affiliates’ respective employees, non-employee directors and consultants. The reserved pool of shares under the 2015 Plan is the sum of (i) 661,745
shares; plus (ii) on January 1 of each calendar year during the term of the 2015 Plan a number of shares equal to the lesser of: (x) 3% of the total number of
shares outstanding on December 31 of the immediately preceding calendar year, (y) an amount determined by our board of directors, and (z) 1,965,930
shares. From and after the effective date of the 2015 Plan, no further grants or awards shall be made under the 2012 Plan. Generally, shares that are forfeited,
cancelled, terminated or expire unexercised, settled in cash in lieu of issuance of shares under the 2015 Plan or the 2012 Plan shall be available for issuance
under new awards. Generally, any shares tendered or withheld to pay the exercise price, purchase price of an award, or any withholding taxes shall be
available for issuance under new awards. Shares delivered pursuant to “substitute awards” (awards granted in assumption or substitution of awards granted by
a company acquired by us) shall not reduce the shares available for issuance under the 2015 Plan. As of December 31, 2017, we had options to purchase
1,664,249 ordinary shares and 88,759 restricted share units outstanding under the 2015 Plan and 1,875,006 ordinary shares reserved for additional grants,
including the increase which was effective on January 1, 2018.
Subject to applicable law, the 2015 Plan is administered by our compensation committee which has full authority in all matters related to the
discharge of its responsibilities and the exercise of its authority under the plan. Awards under the 2015 Plan may be granted until 10 years after the effective
date of the 2015 Plan.
The terms of options granted under the 2015 Plan, including the exercise price, vesting provisions and the duration of an option, shall be determined
by the compensation committee and set forth in an award agreement. Except as provided in the applicable award agreement, or in the discretion of the
compensation committee, an option may be exercised only to the extent that it is then exercisable and shall terminate immediately upon a termination of
service of the grantee.
68
Table of Contents
Share appreciation rights, or SARs, are awards entitling a grantee to receive a payment representing the difference between the base price per share
of the right and the fair market value of a share on the date of exercise. SARs may be granted in tandem with an option or independent and unrelated to an
option. The terms of SARs granted under the 2015 Plan, including the base price per share, vesting provisions and the duration of an SAR, shall be
determined by the compensation committee and set forth in an award agreement. Except as provided in the applicable award agreement, or in the discretion of
the compensation committee, a SAR may be exercised only to the extent that it is then exercisable and shall terminate immediately upon a termination of
service of the grantee. At the discretion of the compensation committee, SARs will be payable in cash, ordinary shares or equivalent value or some
combination thereof.
Restricted share awards are ordinary shares that are awarded to a grantee subject to the satisfaction of the terms and conditions established by the
compensation committee in the award agreement. Until such time as the applicable restrictions lapse, restricted shares are subject to forfeiture and may not be
sold, assigned, pledged or otherwise disposed of by the grantee who holds those shares.
Restricted share units are awards covering a number of hypothetical units with respect to shares that are granted subject to such vesting and transfer
restrictions and conditions of payment as the compensation committee may determine in an award agreement. Restricted share units are payable in cash,
ordinary shares of equivalent value or a combination thereof.
The 2015 Plan provides for the grant of cash-based award and other share-based awards (which are equity-based or equity related award not
otherwise described in the 2015 Plan). The terms of such cash-based awards or other share-based shall be determined by the compensation committee and set
forth in the award agreement.
The Committee may grant dividend equivalents based on the dividends declared on shares that are subject to any award. Dividend equivalents may
be subject to any limitations and/or restrictions determined by the compensation committee and shall be converted to cash or additional shares by such
formula and at such time, and shall be paid at such times, as may be determined by the compensation committee.
In the event of any dividend (excluding any ordinary dividend) or other distribution, recapitalization, share split, reverse share split, reorganization,
merger, consolidation, split-up, split-off, combination, repurchase or exchange of shares or similar event (including a change in control) that affects the
ordinary shares, the compensation committee shall make any such adjustments in such manner as it may deem equitable, including any or all of the following:
(i) adjusting the number of shares available for grant under the 2015 Plan, (ii) adjusting the terms of outstanding awards, (iii) providing for a substitution or
assumption of awards and (iv) cancelling awards in exchange for a payment in cash. In the event of a change of control, each outstanding award shall be
treated as the compensation committee determines, including, without limitation, (i) that each award be honored or assumed, or equivalent rights substituted
therefor, by the new employer or (ii) that all unvested awards will terminate upon the change in control. Notwithstanding the foregoing, in the event that it is
determined that neither (i) or (ii) in the preceding sentence will apply, all awards will become fully vested.
2015 Israeli Sub Plan
The 2015 Israeli Sub Plan provides for the grant by us of awards pursuant to Sections 102 and 3(i) of the Ordinance, and the rules and regulations
promulgated thereunder. The 2015 Israeli Sub Plan is effective with respect to awards granted as of 30 days from the date we submitted it to the Israeli Tax
Authority, or the ITA. The 2015 Israeli Sub Plan provides for awards to be granted to those of our or our affiliates’ employees, directors and officers who are
not Controlling Shareholders, as defined in the Ordinance, and who are considered Israeli residents, to the extent that such awards either are (i) intended to
qualify for special tax treatment under the “capital gains track” provisions of Section 102(b) of the Ordinance or (ii) not intended to qualify for such special
tax treatment. The 2015 Israeli Sub Plan also provides for the grant of awards under Section 3(i) of the Ordinance to our Israeli non-employee service
providers and Controlling Shareholders, who are not eligible for such special tax treatment.
69
Table of Contents
2015 U.S. Sub Plan
The 2015 U.S. Sub Plan applies to grantees that are subject to U.S. federal income tax. The 2015 U.S. Sub Plan provides that options granted to the
U.S. grantees will either be incentive stock options pursuant to Section 422 of the Internal Revenue Code or nonqualified stock options. Options, other than
certain incentive stock options described below, must have an exercise price not less than 100% of the fair market value of an underlying share on the date of
grant. Incentive stock options that are not exercised within 10 years from the grant date expire, provided that incentive stock options granted to a person
holding more than 10% of our voting power will expire within five years from the date of the grant and must have an exercise price at least equal to 110% of
the fair market value of an underlying share on the date of grant. The number of shares available under the 2015 Plan for grants of incentive stock options
shall be the total number of shares available under the 2015 Plan subject to any limitations under the Internal Revenue Code and provided that shares
delivered pursuant to “substitute awards” shall reduce the shares available for issuance of incentive stock options under the 2015 Plan. It is the intention that
no award shall be deferred compensation subject to Section 409A of the Internal Revenue Code unless and to the extent that the compensation committee
specifically determines otherwise. If the compensation committee determines an award will be subject to Section 409A of the Internal Revenue Code such
awards shall be intended to comply in all respects with Section 409A of the Code, and the 2015 Plan and the terms and conditions of such awards shall be
interpreted and administered accordingly.
Employee Stock Purchase Plan
We have adopted an employee stock purchase plan, or ESPP, pursuant to which our employees and employees of our subsidiaries may elect to have
payroll deductions (or, when not allowed under local laws or regulations, another form of payment) made on each pay day during the offering period in an
amount not exceeding 15% of the compensation which the employees receive on each pay day during the offering period. To date, we have not granted
employees the right to make purchases under the plan. The number of shares initially reserved for purchase under the ESPP is 242,425 ordinary shares, which
will be automatically increased annually on January 1 by a number of ordinary shares equal to the lesser of (i) 1% of the total number of shares outstanding
on December 31 of the immediately preceding calendar year, (ii) an amount determined by our board of directors, if so determined prior to January 1 of the
year on which the increase will occur, and (iii) 655,310 shares.
The ESPP is administered by our board of directors or by a committee designated by the board of directors. Subject to those rights which are
reserved to the board of directors or which require shareholder approval under Israeli law, our board of directors has designated the compensation committee
to administer the ESPP. To the extent that we grant employees the right to make purchases under the ESPP, on the first day of each offering period, each
participating employee will be granted an option to purchase on the exercise date of such offering period up to a number of the company’s ordinary shares
determined by dividing (1) the employee’s payroll deductions accumulated prior to such exercise date and retained in the employee’s account as of the
exercise date by (2) the applicable purchase price. The applicable purchase price is based on a discount percentage of up to 15%, which percentage may be
decreased by the board or the compensation committee, multiplied by the lesser of (1) the fair market value of an ordinary share on the exercise date, or (2)
the fair market value of an ordinary share on the offering date.
C. Board Practices
Board of Directors
Under the Companies Law, the management of our business is vested in our board of directors. Our board of directors may exercise all powers and
may take all actions that are not specifically granted to our shareholders or to management. Our executive officers are responsible for our day-to-day
management and have individual responsibilities established by our board of directors. Our Chief Executive Officer is appointed by, and serves at the
discretion of, our board of directors, subject to the employment agreement that we have entered into with him. All other executive officers are also appointed
by our board of directors, and are subject to the terms of any applicable employment agreements that we may enter into with them.
70
Table of Contents
Under our articles, our board of directors must consist of at least five and not more than nine directors, including at least two external directors
required to be appointed under the Companies Law. Our board of directors consists of nine directors, including our two external directors. Other than external
directors, for whom special election requirements apply under the Companies Law, as detailed below, our directors are divided into three classes with
staggered three-year terms. Each class of directors consists, as nearly as possible, of one-third of the total number of directors constituting the entire board of
directors (other than the external directors). At each annual general meeting of our shareholders, the election or re-election of directors following the
expiration of the term of office of the directors of that class of directors is for a term of office that expires on the third annual general meeting following such
election or re-election, such that at each annual general meeting the term of office of only one class of directors expires. Each director will hold office until
the annual general meeting of our shareholders in which his or her term expires, unless they are removed by a vote of 65% of the total voting power of our
shareholders at a general meeting of our shareholders or upon the occurrence of certain events, in accordance with the Companies Law and our articles.
Our directors are divided among the three classes as follows:
(i)
(ii)
the Class I directors are Alon Lumbroso and Dov Ofer, and their terms expire at the annual general meeting of the shareholders to be held in
2019 and when their successors are elected and qualified;
the Class II directors are Ofer Ben-Zur and Gabi Seligsohn, and their terms expire at our annual general meeting of the shareholders to be held
in 2020 and when their successors are elected and qualified; and
(iii)
the Class III directors are Eli Blatt, Yuval Cohen and Marc Lesnick, and their terms expire at our annual general meeting of the shareholders to
be held in 2018 and when their successors are elected and qualified.
Our board of directors has determined that our directors, Lauri Hanover, Alon Lumbroso, Jerry Mandel and Dov Ofer are independent under the
rules of the NASDAQ Stock Market. The definition of “independent director” under the NASDAQ Stock Market rules and “external director” under the
Companies Law overlap to a significant degree such that we would generally expect the two directors serving as external directors to satisfy the requirements
to be independent under the NASDAQ Stock Market rules. However, it is possible for a director to qualify as an “external director” under the Companies Law
without qualifying as an “independent director” under the NASDAQ Stock Market rules, or vice-versa. The definition of external director under the
Companies Law includes a set of statutory criteria that must be satisfied, including criteria whose aim is to ensure that there is no factor that would impair the
ability of the external director to exercise independent judgment. The definition of independent director under the NASDAQ Stock Market rules specifies
similar, although less stringent, requirements in addition to the requirement that the board of directors consider any factor which would impair the ability of
the independent director to exercise independent judgment. In addition, both external directors and independent directors serve for a period of three years;
external directors pursuant to the requirements of the Companies Law and independent directors pursuant to the staggered board provisions of our articles.
However, external directors must be elected by a special majority of shareholders while independent directors may be elected by an ordinary majority. See
“—External Directors” for a description of the requirements under the Companies Law for a director to serve as an external director.
Under the Companies Law and our articles, nominees for directors may also be proposed by any shareholder holding at least 1% of our outstanding
voting power. However, any such shareholder may propose a nominee only if a written notice of such shareholder’s intent to propose a nominee has been
given to our Secretary (or, if we have no such Secretary, our Chief Executive Officer). Any such notice must include certain information, including, among
other things, a description of all arrangements between the nominating shareholder and the proposed director nominee(s) and any other person pursuant to
which the nomination(s) are to be made by the nominating shareholder, the consent of the proposed director nominee(s) to serve as our director(s) if elected
and a declaration signed by the nominee(s) declaring that there is no limitation under the Companies Law preventing their election, and that all of the
information that is required under the Companies Law to be provided to us in connection with such election has been provided.
In addition, our articles allow our board of directors to appoint directors to fill vacancies on our board of directors for a term of office equal to the
remaining period of the term of office of the director(s) whose office(s) have been vacated. External directors are elected for an initial term of three years and
may be elected for additional three-year terms under the circumstances described below. External directors may be removed from office only under the
limited circumstances set forth in the Companies Law. See “—External Directors.”
Under the Companies Law, our board of directors must determine the minimum number of directors who are required to have accounting and
financial expertise. See “—External Directors” below. In determining the number of directors required to have such expertise, our board of directors must
consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that the
minimum number of directors of our company who are required to have accounting and financial expertise is one.
71
Table of Contents
Under regulations promulgated under the Companies Law, Israeli public companies whose shares are traded on certain U.S. stock exchanges, such as
the NASDAQ Global Select Market, and that lack a controlling shareholder (as defined below) are exempt from the requirement to appoint external directors.
Any such company is also exempt from the Companies Law requirements related to the composition of the audit and compensation committees of the Board.
Eligibility for these exemptions is conditioned on compliance with U.S. stock exchange listing rules related to majority Board independence and the
composition of the audit and compensation committees of the Board, as applicable to all listed domestic U.S. companies.
External Directors
Under the Companies Law, we are required to include on our board of directors at least two members who qualify as external directors. Lauri
Hanover and Jerry Mandel serve as our external directors.
The provisions of the Companies Law set forth special approval requirements for the election of external directors. External directors must be
elected by a majority vote of the shares present and voting at a meeting of shareholders, provided that either:
● such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and who lack a personal
interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that
are voted at the meeting, excluding abstentions, to which we refer as a disinterested majority; or
● the total number of shares voted by non-controlling, disinterested shareholders and by shareholders (as described in the previous bullet point)
against the election of the external director does not exceed 2% of the aggregate voting rights in the company.
The term “controlling shareholder” as used in the Companies Law for purposes of all matters related to external directors and for certain other
purposes (such as the requirements related to appointment to the audit committee or compensation committee, as described below), means a shareholder with
the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if
the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general
manager (chief executive officer).
The initial term of an external director is three years. Thereafter, an external director may be reelected by shareholders to serve in that capacity for up
to two additional three-year terms, provided that:
● his or her service for each such additional term is recommended by one or more shareholders holding at least 1% of the company’s voting rights
and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held by non-controlling, disinterested
shareholders voting for such reelection exceeds 2% of the aggregate voting rights in the company and subject to additional restrictions set forth
in the Companies Law with respect to the affiliation of the external director nominee;
● the external director proposed his or her own nomination, and such nomination was approved in accordance with the requirements described in
the paragraph above; or
● his or her service for each such additional term is recommended by the board of directors and is approved at a meeting of shareholders by the
same majority required for the initial election of an external director (as described above).
72
Table of Contents
The term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including the NASDAQ Global Select
Market, may be extended indefinitely in increments of additional three-year terms, in each case provided that the audit committee and the board of directors
of the company confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the
reelection for such additional period(s) is beneficial to the company, and provided that the external director is reelected subject to the same shareholder vote
requirements (as described above regarding the reelection of external directors). Prior to the approval of the reelection of the external director at a general
meeting of shareholders, the company’s shareholders must be informed of the term previously served by him or her and of the reasons why the board of
directors and audit committee recommended the extension of his or her term.
External directors may be removed from office by a special general meeting of shareholders called by the board of directors, which approves such
dismissal by the same shareholder vote percentage required for their election or by a court, in each case, only under limited circumstances, including ceasing
to meet the statutory qualifications for appointment, or violating their duty of loyalty to the company.
If an external directorship becomes vacant and there are fewer than two external directors on the board of directors at the time, then the board of
directors is required under the Companies Law to call a shareholders’ meeting as soon as practicable to appoint a replacement external director.
Each committee of the board of directors that exercises the powers of the board of directors must include at least one external director, except that
the audit committee and the compensation committee must include all external directors then serving on the board of directors and an external director must
serve as the chair thereof. Under the Companies Law, external directors of a company are prohibited from receiving, directly or indirectly, any compensation
from the company other than for their services as external directors pursuant to the Companies Law and the regulations promulgated thereunder.
Compensation of an external director is determined prior to his or her appointment and may not be changed during his or her term subject to certain
exceptions.
The Companies Law provides that a person is not qualified to be appointed as an external director if (i) the person is a relative of a controlling
shareholder of the company, or (ii) if that person or his or her relative, partner, employer, another person to whom he or she was directly or indirectly
subordinate, or any entity under the person’s control, has or had, during the two years preceding the date of appointment as an external director: (a) any
affiliation or other disqualifying relationship with the company, with any person or entity controlling the company or a relative of such person, or with any
entity controlled by or under common control with the company; or (b) in the case of a company with no shareholder holding 25% or more of its voting
rights, had at the date of appointment as an external director, any affiliation or other disqualifying relationship with a person then serving as chairman of the
board or chief executive officer, a holder of 5% or more of the issued share capital or voting power in the company or the most senior financial officer.
The term “relative” is defined in the Companies Law as a spouse, sibling, parent, grandparent or descendant; spouse’s sibling, parent or descendant;
and the spouse of each of the foregoing persons.
Under the Companies Law, the term “affiliation” and the similar types of disqualifying relationships, as used above, include (subject to certain
exceptions):
● an employment relationship;
● a business or professional relationship even if not maintained on a regular basis (excluding insignificant relationships);
● control; and
● service as an office holder, excluding service as a director in a private company prior to the initial public offering of its shares if such director
was appointed as a director of the private company in order to serve as an external director following the initial public offering.
The term “office holder” is defined in the Companies Law as a general manager, chief business manager, deputy general manager, vice general
manager, any other person assuming the responsibilities of any of these positions regardless of that person’s title, a director and any other manager directly
subordinate to the general manager.
73
Table of Contents
In addition, no person may serve as an external director if that person’s position or professional or other activities create, or may create, a conflict of
interest with that person’s responsibilities as a director or otherwise interfere with that person’s ability to serve as an external director or if the person is an
employee of the Israel Securities Authority or of an Israeli stock exchange. A person may furthermore not continue to serve as an external director if he or she
received direct or indirect compensation from the company including amounts paid pursuant to indemnification or exculpation contracts or commitments and
insurance coverage for his or her service as an external director, other than as permitted by the Companies Law and the regulations promulgated thereunder.
Following the termination of an external director’s service on a board of directors, such former external director and his or her spouse and children
may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s control. This
includes engagement as an office holder of the company or a company controlled by its controlling shareholder or employment by, or provision of services to,
any such company for consideration, either directly or indirectly, including through a corporation controlled by the former external director. This restriction
extends for a period of two years with regard to the former external director and his or her spouse or child and for one year with respect to other relatives of
the former external director.
If at the time at which an external director is appointed all members of the board of directors who are not controlling shareholders or relatives of
controlling shareholders of the company are of the same gender, the external director to be appointed 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.
According to the Companies Law and regulations promulgated thereunder, a person may be appointed as an external director only if he or she has
professional qualifications or if he or she has accounting and financial expertise (each, as defined below), provided that at least one of the external directors
must be determined by our board of directors to have accounting and financial expertise. However, if at least one of our other directors (i) meets the
independence requirements under the Exchange Act, (ii) meets the standards of the Listing Rules of the NASDAQ Stock Market rules for membership on the
audit committee, and (iii) has accounting and financial expertise as defined under the Companies Law, then neither of our external directors is required to
possess accounting and financial expertise as long as each possesses the requisite professional qualifications.
A director with accounting and financial expertise is a director who, due to his or her education, experience and skills, possesses an expertise in, and
an understanding of, financial and accounting matters and financial statements, such that he or she is able to understand the financial statements of the
company and initiate a discussion about the presentation of financial data. A director is deemed to have professional qualifications if he or she has any of (i)
an academic degree in economics, business management, accounting, law or public administration, (ii) an academic degree or has completed another form of
higher education in the primary field of business of the company or in a field which is relevant to his/her position in the company, or (iii) at least five years of
experience serving in one of the following capacities, or at least five years of cumulative experience serving in two or more of the following capacities: (a) a
senior business management position in a company with a significant volume of business; (b) a senior position in the company’s primary field of business; or
(c) a senior position in public administration or service. The board of directors is charged with determining whether a director possesses financial and
accounting expertise or professional qualifications.
Our board of directors has determined that each of Lauri Hanover and Jerry Mandel possesses accounting expertise, financial expertise and
professional qualifications as defined under the Companies Law.
Leadership Structure of the Board
In accordance with the Companies Law and our articles, our board of directors is required to appoint one of its members to serve as chairman of the
board of directors. Our board of directors has appointed Yuval Cohen to serve as chairman of the board of directors.
74
Table of Contents
Board Committees
Audit Committee
Our audit committee consists of our two external directors, Lauri Hanover (Chairperson) and Jerry Mandel as well as Dov Ofer.
Companies Law Requirements
Under the Companies Law, we are required to appoint an audit committee. The audit committee must be comprised of at least three directors,
including all of the external directors, one of whom must serve as chairperson of the committee. The audit committee may not include the chairman of the
board, a controlling shareholder of the company, a relative of a controlling shareholder, a director employed by or providing services on a regular basis to the
company, to a controlling shareholder or to an entity controlled by a controlling shareholder, or a director who derives most of his or her income from a
controlling shareholder. In addition, under the Companies Law, the audit committee of a publicly traded company must consist of a majority of independent
directors. In general, an “independent director” under the Companies Law is defined as either an external director or as a director who meets the following
criteria:
● he or she meets the qualifications for being appointed as an external director, except for the requirement (i) that the director be an Israeli resident
(which does not apply to companies such as ours whose securities have been offered outside of Israel or are listed for trading outside of Israel)
and (ii) for accounting and financial expertise or professional qualifications; and
● he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than two
years in the service shall not be deemed to interrupt the continuation of the service.
However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as the NASDAQ Global Select
Market, and who do not have a controlling shareholder, do not have to meet the independent majority requirement; provided, however, that the audit
committee meets other Companies Law composition requirements, as well as the requirements of the jurisdiction where the company’s securities are traded.
As we currently do not meet the requirements applicable to U.S. companies listed on the NASDAQ Global Select Market, we are obligated to meet the
majority requirement, although this may change in the future.
NASDAQ Listing Requirements
Under NASDAQ corporate governance rules, we are required to maintain an audit committee consisting of at least three independent directors, each
of whom is financially literate and one of whom has accounting or related financial management expertise.
All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and
NASDAQ corporate governance rules. Our board of directors has determined that Lauri Hanover and Jerry Mandel is each an audit committee financial
expert as defined by the SEC rules and has the requisite financial experience as defined by NASDAQ corporate governance rules.
Each of the members of our audit committee is “independent” as such term is defined in Rule 10A-3(b)(1) under the Exchange Act and satisfies the
independent director requirements under the NASDAQ Stock Market rules.
75
Table of Contents
Audit Committee Role
Our board of directors has an audit committee charter that sets forth the responsibilities of the audit committee consistent with the rules and
regulations of the SEC and the listing requirements of the NASDAQ Stock Market, as well as the requirements for such committee under the Companies Law,
including the following:
● oversight of our independent registered public accounting firm and recommending the engagement, compensation or termination of engagement
of our independent registered public accounting firm to the board of directors in accordance with Israeli law;
● recommending the engagement or termination of the person filling the office of our internal auditor; and
● Recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by our
board of directors.
Our audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting,
auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent accountants and
reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the
audit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent of
management.
Under the Companies Law, our audit committee is responsible for:
● determining whether there are deficiencies in the business management practices of our company, including in consultation with our internal
auditor or the independent auditor, and making recommendations to the board of directors to improve such practices;
● determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest and
whether such transaction is material or extraordinary under the Companies Law) (see “—Approval of Related Party Transactions under Israeli
Law”);
● establishing the approval process (including, potentially, the approval of the audit committee and conducting a competitive procedure supervised
by the audit committee) for certain transactions with a controlling shareholder or in which a controlling shareholder has a personal interest;
● where the board of directors approves the working plan of the internal auditor, examining such working plan before its submission to the board
of directors and proposing amendments thereto;
● examining our internal audit controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and
tools to fulfill his or her responsibilities;
● examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or
shareholders, depending on which of them is considering the appointment of our auditor; and
● establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to
such employees.
Our audit committee may not approve any actions requiring its approval (see “—Approval of Related Party Transactions under Israeli Law”), unless
at the time of the approval a majority of the committee’s members are present, which majority consists of independent directors including at least one external
director.
Compensation Committee and Compensation Policy
Our compensation committee consists of our two external directors, Jerry Mandel (Chairman) and Lauri Hanover as well as Dov Ofer.
76
Table of Contents
Companies Law Requirements
Under the Companies Law, the board of directors of a public company must appoint a compensation committee. The compensation committee must
be comprised of at least three directors, including all of the external directors, who must constitute a majority of the members of, and include the chairman of,
the compensation committee. However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as the NASDAQ
Global Select Market, and who do not have a controlling shareholder, do not have to meet this majority requirement; provided, however, that the
compensation committee meets other Companies Law composition requirements, as well as the requirements of the jurisdiction where the company’s
securities are traded. As we currently do not meet the requirements applicable to U.S. companies listed on the NASDAQ Global Select Market, we are
obligated to meet the majority requirement, although this may change in the future. Each compensation committee member who is not an external director
must be a director whose compensation does not exceed an amount that may be paid to an external director. The compensation committee is subject to the
same Companies Law restrictions as the audit committee as to who may not be a member of the compensation committee.
The duties of the compensation committee include the recommendation to the company’s board of directors of a policy regarding the terms of
engagement of office holders, to which we refer as a compensation policy. That policy must be adopted by the company’s board of directors, after considering
the recommendations of the compensation committee, and must be brought for approval by the company’s shareholders, which approval requires what we
refer to as a Special Approval for Compensation. A Special Approval for Compensation requires shareholder approval by a majority vote of the shares present
and voting at a meeting of shareholders called for such purpose, provided that either: (a) such majority includes at least a majority of the shares held by all
shareholders who are not controlling shareholders and do not have a personal interest in such compensation arrangement; or (b) the total number of shares of
non-controlling shareholders and shareholders who do not have a personal interest in the compensation arrangement and who vote against the arrangement
does not exceed 2% of the company’s aggregate voting rights.
The compensation policy must serve as the basis for decisions concerning the financial terms of employment or engagement of office holders,
including exculpation, insurance, indemnification or any monetary payment, obligation of payment or other benefit in respect of employment or engagement.
The compensation policy must relate to certain factors, including advancement of the company’s objectives, the company’s business plan and its long-term
strategy, and creation of appropriate incentives for office holders. It must also consider, among other things, the company’s risk management, size and the
nature of its operations. The compensation policy must include certain principles, such as: a link between variable compensation and long-term performance
and measurable criteria; the relationship between variable and fixed compensation; and the minimum holding or vesting period for variable, equity-based
compensation.
The compensation committee is responsible for (a) recommending the compensation policy to a company’s board of directors for its approval (and
subsequent approval by its shareholders) and (b) duties related to the compensation policy and to the compensation of a company’s office holders as well as
functions with respect to matters related to approval of the terms of engagement of office holders, including:
● recommending whether a compensation policy should continue in effect, if the then-current policy has a term of greater than three years
(approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three years);
● recommending to the board of directors periodic updates to the compensation policy and assessing implementation of the compensation policy;
● approving compensation terms of executive officers, directors and employees that require approval of the compensation committee;
● determining whether the compensation terms of a chief executive officer nominee, which were determined pursuant to the compensation policy,
will be exempt from approval of the shareholders because such approval would harm the ability to engage with such nominee; and
● determining, subject to the approval of the board and under special circumstances, override a determination of the company’s shareholders
regarding certain compensation related issues.
Consistent with the foregoing requirements, following the recommendation of our compensation committee, our Board and our shareholders
approved our compensation policy in July 2015 and September 2015, respectively.
77
Table of Contents
NASDAQ Listing Requirements
Under NASDAQ corporate governance rules, we are required to maintain a compensation committee consisting of at least two independent directors.
Each of the members of the compensation committee is required to be independent under NASDAQ rules relating to compensation committee members,
which are different from the general test for independence of board and committee members. Each of the members of our compensation committee satisfies
those requirements.
Compensation Committee Role
Our board of directors adopted a compensation committee charter that sets forth the responsibilities of the compensation committee, which include:
● the responsibilities set forth in the compensation policy;
● reviewing and approving the granting of options and other incentive awards to the extent such authority is delegated by our board of directors;
and
● reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors.
Compensation of Directors
Under the Companies Law, compensation of directors requires the approval of a company’s compensation committee, the subsequent approval of the
board of directors and, unless exempted under the regulations promulgated under the Companies Law, the approval of the shareholders at a general meeting.
Where the director is also a controlling shareholder, the requirements for approval of transactions with controlling shareholders apply, as described below
under “Disclosure of Personal Interests of a Controlling Shareholder and Approval of Certain Transactions.”
The directors are also entitled to be paid reasonable travel, hotel and other expenses expended by them in attending board meetings and performing
their functions as directors of the company, all of which is to be determined by the board of directors.
External directors are entitled to remuneration subject to the provisions and limitations set forth in the regulations promulgated under the Companies
Law.
For additional information, see “—Compensation of Officers and Directors.”
Internal Auditor
Under the Companies Law, the board of directors of an Israeli public company must appoint an internal auditor recommended by the audit
committee. An internal auditor may not be:
● a person (or a relative of a person) who holds 5% or more of the company’s outstanding shares or voting rights;
● a person (or a relative of a person) who has the power to appoint a director or the general manager of the company;
● an office holder (including a director) of the company (or a relative thereof); or
● a member of the company’s independent auditor, or anyone on its behalf.
The role of the internal auditor is to examine, among other things, our compliance with applicable law and orderly business procedures. The audit
committee is required to oversee the activities and to assess the performance of the internal auditor as well as to review the internal auditor’s work plan. Irena
Ben-Yakar of Brightman Almagor & Zohar (Deloitte) serves as our internal auditor.
78
Table of Contents
Approval of Related Party Transactions Under Israeli Law
Fiduciary Duties of Directors and Executive Officers
The Companies Law codifies the fiduciary duties that office holders owe to a company. Each person listed in the table under “Directors and Senior
Management” is an office holder under the Companies Law.
An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the level of
care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty requires that an office
holder act in good faith and in the best interests of the company.
The duty of care includes a duty to use reasonable means to obtain:
● information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and
● all other important information pertaining to any such action.
The duty of loyalty includes a duty to:
● refrain from any conflict of interest between the performance of his or her duties to the company and his or her other duties or personal affairs;
● refrain from any activity that is competitive with the business of the company;
● refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and
● disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her
position as an office holder.
Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions
The Companies Law requires that an office holder promptly disclose to the board of directors any personal interest that he or she may be aware of
and all related material information or documents concerning any existing or proposed transaction with the company. An interested office holder’s disclosure
must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. A personal interest
includes an interest of any person in an act or transaction of a company, including a personal interest of such person’s relative or of a corporate body in which
such person or a relative of such person is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one
director or the general manager, but excluding a personal interest stemming from one’s ownership of shares in the company.
A personal interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the personal interest of
the office holder with respect to his or her vote on behalf of a person for whom he or she holds a proxy even if such shareholder has no personal interest in the
matter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a
transaction that is not considered an extraordinary transaction. Under the Companies Law, an extraordinary transaction is defined as any of the following:
● a transaction other than in the ordinary course of business;
79
Table of Contents
● a transaction that is not on market terms; or
● a transaction that may have a material impact on a company’s profitability, assets or liabilities.
If it is determined that an office holder has a personal interest in a transaction which is not an extraordinary transaction, approval by the board of
directors is required for the transaction, unless the company’s articles of association provide for a different method of approval. Further, so long as an office
holder has disclosed his or her personal interest in a transaction, the board of directors may approve an action by the office holder that would otherwise be
deemed a breach of his or her duty of loyalty. However, a company may not approve a transaction or action that is not in the best interests of the company or
that is not performed by the office holder in good faith. An extraordinary transaction in which an office holder has a personal interest requires approval first
by the company’s audit committee and subsequently by the board of directors. The compensation of, or an undertaking to indemnify or insure, an office
holder who is not a director requires approval first by the company’s compensation committee, then by the company’s board of directors. If such
compensation arrangement or an undertaking to indemnify or insure is inconsistent with the company’s stated compensation policy, or if the office holder is
the chief executive officer (apart from a number of specific exceptions), then such arrangement is further subject to a Special Approval for Compensation.
Arrangements regarding the compensation, indemnification or insurance of a director require the approval of the compensation committee, board of directors
and shareholders by ordinary majority, in that order, and under certain circumstances, a Special Approval for Compensation.
Generally, a person who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee may not
be present at such a meeting or vote on that matter unless the chairman of the relevant committee or board of directors (as applicable) determines that he or
she should be present in order to present the transaction that is subject to approval. If a majority of the members of the audit committee or the board of
directors (as applicable) has a personal interest in the approval of a transaction, then all directors may participate in discussions of the audit committee or the
board of directors (as applicable) on such transaction and the voting on approval thereof, but shareholder approval is also required for such transaction.
Disclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions
Pursuant to Israeli law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a
controlling shareholder of a public company. The Companies Law provides a broader definition of a controlling shareholder solely with respect to the
provisions pertaining to related party transactions. For such purposes, a controlling shareholder is a shareholder that has the ability to direct the activities of a
company, including by holding 50% or more of the voting rights in a company or by having the right to appoint the majority of the directors of the company
or its general manager (chief executive officer), and furthermore, by holding 25% or more of the voting rights if no other shareholder holds more than 50% of
the voting rights. For this purpose, the holdings of all shareholders who have a personal interest in the same transaction will be aggregated. An extraordinary
transaction between a public company and a controlling shareholder or in which a controlling shareholder has a personal interest and the terms of any
compensation arrangement of a controlling shareholder who is an office holder or his relative, require the approval of a company’s audit committee (or
compensation committee with respect to compensation arrangements), board of directors and shareholders, in that order. In addition, the shareholder approval
must fulfill one of the following requirements:
● at least a majority of the shares held by all shareholders who do not have a personal interest in the transaction and who are present and voting at
the meeting approves the transaction, excluding abstentions; or
● the shares voted against the transaction by shareholders who have no personal interest in the transaction and who are present and voting at the
meeting do not exceed 2% of the voting rights in the company.
To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every
three years, unless, with respect to certain transactions, the audit committee determines that the duration of the transaction is reasonable given the
circumstances related thereto.
80
Table of Contents
Arrangements regarding the compensation, indemnification or insurance of a controlling shareholder in his or her capacity as an office holder require
the approval of the compensation committee, board of directors and shareholders by a Special Majority, in that order, and the terms thereof may not be
inconsistent with the company’s stated compensation policy.
Pursuant to regulations promulgated under the Companies Law, certain transactions with a controlling shareholder or his or her relative, or with
directors, that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval upon certain determinations of the
audit committee and board of directors. Under these regulations, a shareholder holding at least 1% of the issued share capital of the company may require,
within 14 days of the publication of such determinations, that despite such determinations by the audit committee and the board of directors, such transaction
will require shareholder approval under the same majority requirements that would otherwise apply to such transactions.
Shareholder Duties
Pursuant to the Companies Law, a shareholder has a duty to act in good faith and in a customary manner 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 a general meeting and at shareholder class meetings
with respect to the following matters:
● an amendment to the company’s articles of association;
● an increase of the company’s authorized share capital;
● a merger; or
● the approval of related party transactions and acts of office holders that require shareholder approval.
A shareholder also has a general duty to refrain from discriminating against other shareholders.
In addition, certain shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any
shareholder who knows that he or she has the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or to
prevent the appointment of an office holder of the company or other power towards the company. The Companies Law does not define the substance of the
duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with
fairness.
Exculpation, Insurance and Indemnification of Directors and Officers
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may
exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of
care but only if a provision authorizing such exculpation is included in its articles of association. Our articles include such a provision. A company may not
exculpate in advance a director from liability arising out of a prohibited dividend or distribution to shareholders.
Under the Companies Law, a company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts
performed by him or her as an office holder, either pursuant to an undertaking made in advance of an event or following an event, provided its articles of
association include a provision authorizing such indemnification:
● financial liability imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award approved
by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an
undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when
the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the
circumstances, and such undertaking shall detail the abovementioned foreseen events and amount or criteria;
81
Table of Contents
● reasonable litigation expenses, including attorneys’ fees, incurred by the office holder (1) as a result of an investigation or proceeding instituted
against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such
office holder as a result of such investigation or proceeding, and (ii) no financial liability was imposed upon him or her as a substitute for the
criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an
offense that does not require proof of criminal intent; and (2) in connection with a monetary sanction; and
● reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against
him or her by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which the office holder was
acquitted, or as a result of a conviction for an offense that does not require proof of criminal intent.
Under the Companies Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an
office holder, if and to the extent provided in the company’s articles of association:
● a breach of the duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the
act would not harm the company;
● a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder;
and
● a financial liability imposed on the office holder in favor of a third party.
Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
● a breach of the duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the
office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company;
● a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
● an act or omission committed with intent to derive illegal personal benefit; or
● a fine or forfeit levied against the office holder.
Under the Companies Law, exculpation, indemnification and insurance of office holders in a public company must be approved by the compensation
committee and the board of directors and, with respect to certain office holders or under certain circumstances, also by the shareholders. See “—Approval of
Related Party Transactions under Israeli Law.”
Our articles permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to be permitted by the Companies Law.
We have obtained directors and officers liability insurance for the benefit of our office holders and intend to continue to maintain such coverage and
pay all premiums thereunder to the fullest extent permitted by the Companies Law. In addition, we entered into agreements with each of our directors and
executive officers exculpating them from liability to us for damages caused to us as a result of a breach of duty of care and undertaking to indemnify them, in
each case, to the fullest extent permitted by our articles and the Companies Law, including with respect to liabilities resulting from a public offering of our
shares, to the extent that these liabilities are not covered by insurance.
82
Table of Contents
D. Employees
As of December 31, 2017, we had 412 employees and subcontractors with 267 located in Israel, 66 in the United States, 42 in Germany and 37 in
Hong Kong. The following table shows the breakdown of our workforce of employees and subcontractors by category of activity as of the dates indicated:
Area of Activity
Service
Sales and marketing
Manufacturing and operations
Research and development
General and administrative
Total
2015
As of December 31,
2016
2017
64
76
68
90
45
343
69
87
68
115
51
390
66
87
73
122
64
412
With respect to our Israeli employees, Israeli labor laws govern the length of the workday and workweek, minimum wages for employees,
procedures for hiring and dismissing employees, determination of severance pay, annual leave, sick days, advance notice of termination of employment,
payments to the National Insurance Institute, equal opportunity and anti-discrimination laws and other conditions of employment. While none of our
employees is party to any collective bargaining agreements, certain provisions of the collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are applicable to our
employees in Israel by order of the Israeli Ministry of the Economy and Industry. These provisions primarily concern pension fund benefits for all employees,
insurance for work-related accidents, recuperation pay and travel expenses. We generally provide our employees with benefits and working conditions beyond
the required minimums. With respect to our German employees, German and European labor laws govern the common employment terms including
worktime, annual leave and employment termination. In addition to that our Kornit Digital Europe GmbH have a work council. Work council must be
consulted about specific employee related issues and has the right to make proposals to management according to the German Works Constitution Act
(BetrVG).
We have never experienced any labor-related work stoppages or strikes and believe our relationships with our employees are good.
E. Share Ownership
For information regarding the share ownership of our directors and executive officers, please refer to “ITEM 6.B. Compensation” and “ITEM 7.A.
Major Shareholders.”
ITEM 7.
Major Shareholders and Related Party Transactions.
A. Major Shareholders
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of February 28, 2018:
● each person or entity known by us to own beneficially 5% or more of our outstanding ordinary shares;
● each of our directors and executive officers individually; and
● all of our executive officers and directors as a group.
83
Table of Contents
The beneficial ownership of our ordinary shares is determined in accordance with the rules of the SEC and generally includes any ordinary shares
over which a person exercises sole or shared voting or investment power, or the right to receive the economic benefit of ownership. For purposes of the table
below, we deem ordinary shares issuable pursuant to options that are currently exercisable or exercisable within 60 days of February 28, 2018 to be
outstanding and to be beneficially owned by the person holding the options for the purposes of computing the percentage ownership of that person, but we do
not treat them as outstanding for the purpose of computing the percentage ownership of any other person. Except where otherwise indicated, we believe,
based on information furnished to us by such owners, that the beneficial owners of the ordinary shares listed below have sole investment and voting power
with respect to such shares. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative
of where such beneficial holders are resident since many of these ordinary shares were held by brokers or other nominees.
Unless otherwise noted below, each shareholder’s address is c/o Kornit Digital Ltd., 12 Ha’Amal Street, Rosh –Ha’Ayin 4809246, Israel.
A description of any material relationship that our principal shareholders have had with us or any of our predecessors or affiliates within the past
three years is included under “Certain Relationships and Related Party Transactions.”
The percentages set forth below are based on 34,277,324 ordinary shares outstanding as of February 28, 2018.
Except where otherwise indicated, we believe, based on information furnished to us by such owners, that the beneficial owners of the ordinary shares
listed below have sole investment and voting power with respect to such shares. All of our shareholders, including the shareholders listed below, have the
same voting rights attached to their ordinary shares. See “ITEM 10.B Articles of Association.”
A description of any material relationship that our major shareholders have had with us or any of our predecessors or affiliates within the past year is
included under “ITEM 7.B—Related Party Transactions.”
Name
5% or Greater Shareholders
Fortissimo Capital Fund II (Israel), L.P.(1)
American Capital Management Inc. (2)
William Blair & Company, LLC (3)
Granahan Investment Management, Inc. (4)
Gilder, Gagnon, Howe & Co. LLC (5)
Senvest Management, LLC(6)
Directors and Executive Officers
Yuval Cohen(7)
Ofer Ben-Zur
Eli Blatt(8)
Lauri Hanover
Marc Lesnick(8)
Alon Lumbroso
Jerry Mandel
Dov Ofer
Gabi Seligsohn(9)
Nuriel Amir
Guy Avidan
Gilad Yron
All Directors and Executive Officers as a Group (12 persons) (10)
* Represents beneficial ownership of less than 1% of our outstanding ordinary shares.
84
Number of
Shares
Beneficially
Held
Percent
4,552,481
2,545,895
2,461,857
2,331,724
1,763,373
1,695,677
4,582,091
10,541
4,573,208
*
4,573,208
*
*
*
492,349
-
*
-
5,250,438
13.3%
7.5%
7.2%
6.8%
5.2%
5.0%
13.4%
*
13.4%
*
13.4%
*
*
*
1.4%
-
*
-
15.0%
Table of Contents
(1) Based on information provided to us by Fortissimo Capital Fund II (Israel), L.P. (“Fortissimo Fund II”), Fortissimo Capital Fund II (GP), L.P.
(“Fortissimo II GP”) and Fortissimo Capital 2 Management (GP) Ltd. (“Fortissimo Management”). Fortissimo II GP is a Cayman Island limited
partnership, which serves as the general partner of Fortissimo Fund II, an Israeli limited partnership: The general partner of Fortissimo II GP is
Fortissimo Management, a Cayman Islands corporation. Messrs. Eli Blatt, Yuval Cohen and Marc Lesnick are members of the investment committee of
Fortissimo Management and share voting and dispositive power with respect to such shares. The principal address of Fortissimo Management is 14
Hamelacha Street, Park Afek, Rosh Ha’Ayin 48091, Israel.
(2) As of December 31, 2017, based on a Schedule 13G filed with the Securities and Exchange Commission on February 1, 2018.
(3) As of December 31, 2017, based on a Schedule 13G filed with the Securities and Exchange Commission on February 12, 2018 by William Blair &
Company, LLC.
(4) As of December 31, 2017, based on a Schedule 13G filed with the Securities and Exchange Commission on February 12, 2018 by Granahan Investment
Management, Inc.
(5) As of December 31, 2017, based on a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2018 by Gilder, Gagnon, Howe
& Co. LLC (“Gilder”). The shares reported include 1,198,972 shares held in customer accounts over which partners and/or employees of Gilder have
discretionary authority to dispose of or direct the disposition of the shares, 44,410 shares held in the account of the profit sharing plan of Gilder, and
519,991 shares held in accounts owned by the partners of Gilder and their families.
(6) As of January 12, 2018, based on a Schedule 13G filed with the Securities and Exchange Commission on January 16, 2018 by Senvest Management,
LLC. The reported securities are held in the accounts of Senvest Master Fund, LP, Senvest Israel Partners Master Fund, LP and Senvest Global (KY), LP
(collectively, the “Senvest Investment Vehicles”). Senvest Management, LLC serves as investment manager of the Investment Vehicles. Richard Mashaal
is the managing member of Senvest Management, LLC. Mr. Mashaal may be deemed to have voting and dispositive powers over the securities held by
the Senvest Investment Vehicles. Senvest Management, LLC may be deemed to beneficially own the securities held by the Senvest Investment Vehicles
by virtue of Senvest Management, LLC’s position as investment manager of each of the Senvest Investment Vehicles. Mr. Mashaal may be deemed to
beneficially own the securities held by the Senvest Investment Vehicles by virtue of Mr. Mashaal’s status as the managing member of Senvest
Management, LLC.
(7) Consists of 4,552,481 ordinary shares held by Fortissimo Capital and options to purchase 29,610 ordinary shares exercisable within 60 days of February
28, 2018.
(8) Consists of 4,552,481 ordinary shares held by Fortissimo Capital and options to purchase 20,727 ordinary shares exercisable within 60 days of February
28, 2018.
(9) Consists of 36,357 ordinary shares and options to purchase 455,992 ordinary shares exercisable within 60 days of February 28, 2018.
(10) Consists of 4,599,379 ordinary shares and options to purchase 651,059 ordinary shares exercisable within 60 days of February 28, 2018.
Recent Significant Changes in the Percentage Ownership of Major Shareholders
In January 2017, Fortissimo Capital sold 6,235,000 of our ordinary shares in a secondary public offering, which decreased its holdings in our
Company from 48.5% to 26.3% (after taking into account the increase in outstanding shares resulting from our concurrent follow-on offering). In February
2017, we were informed by FMR LLC that they had sold all of their shares of the Company previously reported to have been held. In May 2017, Fortissimo
Capital sold 4,250,000 of our ordinary shares in a secondary public offering, which, following a concurrent follow-on offering by the Company decreased its
holdings in our Company to 4,552,481. Other than the foregoing, there have been no recent significant changes in the percentage ownership of major
shareholders.
B. Related Party Transactions
Our policy is to enter into transactions with related parties on terms that, on the whole, are no more favorable, or no less favorable than those
available from unaffiliated third parties. Based on our experience in the business sectors in which we operate and the terms of our transactions with
unaffiliated third parties, we believe that all of the transactions described below met this policy standard at the time they occurred. The following is a
description of material transactions, or series of related material transactions, since January 1, 2017, to which we were or will be a party and in which the
other parties included or will include our directors, executive officers, holders of more than 10% of our voting securities or any member of the immediate
family of any of the foregoing persons.
85
Table of Contents
Investors’ Rights Agreement
We are party to an amended and restated investors’ rights agreement, dated March 18, 2015, or the Investors’ Rights Agreement, with certain of our
shareholders.
Demand Registration Rights
At any time, Fortissimo Capital may request that we file a registration statement. Upon receipt of such registration request, we are obligated to use
our reasonable commercial efforts to file the registration statement as soon as possible. We have the right not to effect such filing during the period that is
within 90 days after we have filed another such registration statement or completed certain other registered offerings or if we intend to file a registration
statement for our own account within 90 days. We are not obligated to file more than two registration statements on Form F-1 pursuant to these demand
provisions. Any other holder of registrable securities has the right to include its registrable securities in an underwritten registration pursuant to a demand
registration.
Piggyback Registration Rights
If we propose to offer any of our ordinary shares in a public offering, the holders of registrable securities are entitled to at least 15 days’ notice prior
to the filing of the relevant registration statement or prospectus and may include all or a portion of their shares in the offering subject to becoming party to a
customary underwriting agreement.
Shelf Registration Rights
If we become eligible to register any of our shares on Form F-3, Fortissimo Capital may request that we file a shelf registration statement for an
offering to be made on a delayed or continuous basis pursuant to Rule 415 under the Securities Act registering the resale from time to time by Fortissimo
Capital of registrable shares. In such event, we are required to give written notice of such request to all holders of registrable securities, who may elect to join
in such request. Subsequently, upon notice from Fortissimo Capital or from the holders of a majority of the outstanding registrable securities, we are required
to effect up to two underwritten takedowns from such shelf registration statement within any 12-month period. We are not required to effect any underwritten
offering with 90 days of another underwritten offering.
Other Provisions
We have the right not to effect any filing or offering if, in the good faith judgment of our board of directors, it would be seriously detrimental to us or
our stockholders for such filing or offering to be effected. We may exercise this right twice in any 12-month period for an aggregate of up to 90 days during
such period.
We will pay all registration expenses (other than underwriting discounts and selling commissions) and the reasonable fees and expenses of a single
counsel for the selling shareholders, related to any demand, piggyback or shelf registration.
The rights of any shareholder who is a party to the Investors’ Rights Agreement to request registration or inclusion of registrable securities in any
registration pursuant hereunder shall terminate when such shareholder holds less than 3% of our outstanding shares and such shareholder’s registrable
securities could be sold without volume restrictions, manner of sale restrictions or notice requirements pursuant to Rule 144 under the Securities Act.
86
Table of Contents
Agreements and Arrangements with, and Compensation of, Directors and Executive Officers
Employment Agreements
We have entered into written employment agreements with each of our executive officers. These agreements provide for notice periods of varying
duration for termination of the agreement by us or by the relevant executive officer, during which time the executive officer will continue to receive base
salary and benefits (except for the accrual of vacation days). These agreements also contain customary provisions regarding non-competition, confidentiality
of information and assignment of inventions. However, the enforceability of the non-competition provisions may be limited under applicable law.
Options
Since our inception we have granted options to purchase our ordinary shares to our officers and certain of our directors. Such option agreements may
contain acceleration provisions upon certain merger, acquisition, or change of control transactions. We describe our option plans under ITEM 6.B.
Compensation. If the relationship between us and an executive officer or a director is terminated, except for cause (as defined in the option plans), all options
that are vested will generally remain exercisable for ninety days after such termination.
The following table provides information regarding the options to purchase our ordinary shares held by each of our directors and officers who
beneficially owns greater than one percent of our ordinary shares:
Name/Title
Yuval Cohen, Chairman of the Board of Directors
Eli Blatt, Director
Marc Lesnick, Director
Gabi Seligsohn, Chief Executive Officer and Director
Indemnification Agreements
Number of
Shares
Underlying
Options
Exercise Price
9.97
9.97
9.97
2.17
12.97
9.49
15.05
29,610 $
20,727 $
20,727 $
320,992 $
120,000 $
120,000 $
120,000 $
Expiration Date
March 6, 2025
March 6, 2025
March 6, 2025
April 27, 2024
September 28, 2025
September 28, 2026
September 28, 2027
Our articles permit us to exculpate, indemnify and insure each of our directors and office holders to the fullest extent permitted by Israeli law. We
have entered into indemnification agreements with each of our directors and executive officers, undertaking to indemnify them to the fullest extent permitted
by Israeli law, including with respect to liabilities resulting from a public offering of our shares, to the extent that these liabilities are not covered by
insurance. We have also obtained Directors and Officers insurance for each of our executive officers and directors. For further information, see “ITEM 6.C
Board Practices—Exculpation, Insurance and Indemnification of Directors and Officers.”
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8.
Financial Information.
A. Statements and Other Financial Information
We have appended our financial statements at the end of this annual report, starting at page F-2, as part of this annual report.
Legal Proceedings
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
Except as set forth below, currently, and in the recent past, we are not and have not been a party to any legal proceedings, nor are there any legal proceedings
(including governmental proceedings) pending or, to our knowledge, threatened against us, that our management believes, individually or in the aggregate,
would have a significant effect on our financial position or profitability. We intend to defend against any claims to which we may become subject, and to
proceed with any claims that we may need to assert against third parties, in a vigorous fashion.
87
Table of Contents
Dividend Distribution Policy
We have never declared or paid any cash dividends on our ordinary shares. We do not anticipate paying any dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to finance operations and expand our business. Our board of directors has sole discretion whether to pay
dividends. If our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital
requirements and surplus, general financial condition, contractual restrictions and other factors that our directors may deem relevant. See “ITEM 3.D—Risk
Factors— Risks Related to Our Ordinary Shares—We have never paid cash dividends on our share capital, and we do not anticipate paying any cash
dividends in the foreseeable future” and “ITEM 10.B—Articles of Association—Dividend and Liquidation Rights” for an explanation concerning the
payment of dividends under Israeli law.
B. Significant Changes
Since the date of our financial statements included in ITEM 18 of this annual report, there has not been a significant change in our company other
than as described elsewhere in this annual report.
ITEM 9.
The Offer and Listing.
A. Listing details
Our ordinary shares have been quoted on the NASDAQ Global Select Market under the symbol “KRNT” since April 2, 2015. Prior to that date, there
was no public trading market for our ordinary shares. Our IPO was priced at $10.00 per share on April 2, 2015. The following table sets forth for the periods
indicated the high and low sales prices per ordinary share as reported on NASDAQ:
Annual:
2017
2016
2015 (beginning April 2, 2015)
Quarterly:
First Quarter 2018 (through March 15, 2018)
Fourth Quarter 2017
Third Quarter 2017
Second Quarter 2017
First Quarter 2017
Fourth Quarter 2016
Third Quarter 2016
Second Quarter 2016
First Quarter 2016
Fourth Quarter 2015
Third Quarter 2015
Second Quarter 2015
Most Recent Six Months (and Most Recent Partial Month):
March 2018 (through March 15, 2018)
February 2018
January 2018
December 2017
November 2017
October 2017
September 2017
88
$
Low
High
(in U.S. dollars)
12.05 $
8.10
9.91
11.70
14.70
12.85
16.46
12.05
9.00
8.90
8.10
8.91
9.91
11.42
11.76
12.55
11.65
14.95
15.10
14.9
14.55
12.85
23.15
14.70
17.50
16.95
17.95
21.80
23.15
19.75
14.70
11.70
11.19
12.00
13.80
15.85
17.50
14.40
14.90
16.95
17.80
17.95
15.90
19.30
Table of Contents
B. Plan of Distribution
Not applicable.
C. Markets
See “—Listing Details” above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Articles of Association
Registration Number and Purposes of the Company
Our registration number with the Israeli Registrar of Companies is 513195420. Our purpose as set forth in our articles is to engage in any lawful
activity.
Voting Rights
All ordinary shares have identical voting and other rights in all respects.
Transfer of Shares
Our fully paid ordinary shares are issued in registered form and may be freely transferred under our articles, unless the transfer is restricted or
prohibited by another instrument, applicable law or the rules of a stock exchange on which the shares are listed for trade. The ownership or voting of our
ordinary shares by non-residents of Israel is not restricted in any way by our articles or the laws of the State of Israel, except for ownership by nationals of
some countries that are, or have been, in a state of war with Israel.
Election of Directors
Our ordinary shares do not have cumulative voting rights for the election of directors. As a result, the holders of a majority of the voting power
represented at a shareholders meeting have the power to elect all of our directors, subject to the special approval requirements for external directors described
under “ITEM 6.C Board Practices— External Directors.”
89
Table of Contents
Under our articles, our board of directors must consist of not less than five but no more than nine directors, including two external directors as
required by the Companies Law. Pursuant to our articles, each of our directors, other than the external directors, for whom special election requirements apply
under the Companies Law, will be appointed by a simple majority vote of holders of our voting shares, participating and voting at an annual general meeting
of our shareholders. In addition, our directors, other than the external directors, are divided into three classes that are each elected at the third annual general
meeting of our shareholders, in a staggered fashion (such that one class is elected each annual general meeting), and serve on our board of directors unless
they are removed by a vote of 65% of the total voting power of our shareholders at a general meeting of our shareholders or upon the occurrence of certain
events, in accordance with the Companies Law and our articles. In addition, our articles allow our board of directors to fill vacancies on the board of directors
or to appoint new directors up to the maximum number of directors permitted under our articles. Such directors serve for a term of office equal to the
remaining period of the term of office of the directors(s) whose office(s) have been vacated or in the case of new directors, for a term of office according to
the class to which such director was assigned upon appointment. External directors are elected for an initial term of three years, may be elected for additional
terms of three years each under certain circumstances, and may be removed from office pursuant to the terms of the Companies Law. See “ITEM 6.C Board
Practices— External Directors.”
Dividend and Liquidation Rights
We may declare a dividend to be paid to the holders of our ordinary shares in proportion to their respective shareholdings. Under the Companies
Law, dividend distributions are determined by the board of directors and do not require the approval of the shareholders of a company unless the company’s
articles of association provide otherwise. Our articles do not require shareholder approval of a dividend distribution and provide that dividend distributions
may be determined by our board of directors.
Pursuant to the Companies Law, the distribution amount is limited to the greater of retained earnings or earnings generated over the previous two
years, according to our then last reviewed or audited financial statements, provided that the end of the period to which the financial statements relate is not
more than six months prior to the date of the distribution. If we do not meet such criteria, we may only distribute dividends with court approval. In each case,
we are only permitted to distribute a dividend if our board of directors and the court, if applicable, determines that there is no reasonable concern that
payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of our ordinary shares in
proportion to their shareholdings. This right, as well as the right to receive dividends, may be affected by the grant of preferential dividend or distribution
rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Exchange Controls
There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the shares or
interest or other payments to non-residents of Israel, except for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.
Shareholder Meetings
Under Israeli law, we are required to hold an annual general meeting of our shareholders once every calendar year that must be held no later than 15
months after the date of the previous annual general meeting. All meetings other than the annual general meeting of shareholders are referred to in our articles
as special general meetings. Our board of directors may call extraordinary general meetings whenever it sees fit, at such time and place, within or outside of
Israel, as it may determine. In addition, the Companies Law provides that our board of directors is required to convene a special general meeting upon the
written request of (i) any two of our directors or one-quarter of the members of our board of directors or (ii) one or more shareholders holding, in the
aggregate, either (a) 5% or more of our outstanding issued shares and 1% of our outstanding voting power or (b) 5% or more of our outstanding voting power.
90
Table of Contents
Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general
meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the
meeting. Furthermore, the Companies Law requires that resolutions regarding the following matters must be passed at a general meeting of our shareholders:
● amendments to our articles;
● appointment or termination of our auditors;
● appointment of external directors;
● approval of certain related party transactions;
● increases or reductions of our authorized share capital;
● a merger; and
● the exercise of our board of director’s powers by a general meeting, if our board of directors is unable to exercise its powers and the exercise of
any of its powers is required for our proper management.
The Companies Law and our articles require that notice of any annual general meeting or extraordinary general meeting be provided to shareholders
at least 21 days prior to the meeting and if the agenda of the meeting includes, among other matters, the appointment or removal of directors, the approval of
transactions with office holders or interested or related parties, approval of the company’s general manager to serve as the chairman of its board of directors
or an approval of a merger, notice must be provided at least 35 days prior to the meeting.
The Companies Law allows one or more of our shareholders holding at least 1% of the voting power of a company to request the inclusion of an
additional agenda item for an upcoming shareholders meeting, assuming that it is appropriate for debate and action at a shareholders meeting. Under
applicable regulations, such a shareholder request must be submitted within three or, for certain requested agenda items, seven days following our publication
of notice of the meeting. If the requested agenda item includes the appointment of director(s), the requesting shareholder must comply with particular
procedural and documentary requirements. If our board of directors determines that the requested agenda item is appropriate for consideration by our
shareholders, we must publish an updated notice that includes such item within seven days following the deadline for submission of agenda items by our
shareholders. The publication of the updated notice of the shareholders meeting does not impact the record date for the meeting. In lieu of this process, we
may opt to provide pre-notice of our shareholders meeting at least 21 days prior to publishing official notice of the meeting. In that case, our 1% shareholders
are given a 14-day period in which to submit proposed agenda items, after which we must publish notice of the meeting that includes any accepted
shareholder proposals.
Under the Companies Law and under our articles, shareholders are not permitted to take action by way of written consent in lieu of a meeting.
Voting Rights
Quorum requirements
Pursuant to our articles, holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote before the
shareholders at a general meeting. As a foreign private issuer, the quorum required for our general meetings of shareholders consists of at least two
shareholders present in person, by proxy or written ballot who hold or represent between them at least 25% of the total outstanding voting rights. A meeting
adjourned for lack of a quorum is generally adjourned to the same day in the following week at the same time and place or to a later time or date if so
specified in the notice of the meeting. At the reconvened meeting, any number of shareholders present in person or by proxy shall constitute a quorum, unless
a meeting was called pursuant to a request by our shareholders, in which case the quorum required is one or more shareholders, present in person or by proxy
and holding the number of shares required to call the meeting as described under “—Shareholder Meetings.”
91
Table of Contents
Vote Requirements
Our articles provide that all resolutions of our shareholders require a simple majority vote, unless otherwise required by the Companies Law or by
our articles. Under the Companies Law, each of (i) the approval of an extraordinary transaction with a controlling shareholder and (ii) the terms of
employment or other engagement of the controlling shareholder of the company or such controlling shareholder’s relative (even if such terms are not
extraordinary) require the approval described in “ITEM 6.C. Board Practices—Approval of Related Party Transactions under Israeli Law.” Additionally, (i)
the approval and extension of a compensation policy and certain deviations therefrom require the approvals described above under “ITEM 6.C Board
Practices— Compensation Committee — Companies Law Requirements,” (ii) the terms of employment or other engagement of the chief executive officer of
the company require the approvals described below in this ITEM 10.B under “Disclosure of Personal Interests of an Office Holder and Approval of Certain
Transactions” and (iii) the chairman of a company’s board of directors also serving as its chief executive officer require the approvals described above under
“ITEM 6.C Board Practices—Board of Directors.” Under our articles, the alteration of the rights, privileges, preferences or obligations of any class of our
shares requires a simple majority of the class so affected (or such other percentage of the relevant class that may be set forth in the governing documents
relevant to such class), in addition to the ordinary majority vote of all classes of shares voting together as a single class at a shareholder meeting. Our articles
also require that the removal of any director from office (other than our external directors) or the amendment of the provisions of our articles relating to our
staggered board requires the vote of 65% of the voting power of our shareholders. Another exception to the simple majority vote requirement is a resolution
for the voluntary winding up, or an approval of a scheme of arrangement or reorganization, of the company pursuant to Section 350 of the Companies Law,
which requires the approval of holders of 75% of the voting rights represented at the meeting, in person or by proxy and voting on the resolution.
Access to Corporate Records
Under the Companies Law, shareholders are provided access to: minutes of our general meetings; our shareholders register and principal
shareholders register, articles of association and annual audited financial statements; and any document that we are required by law to file publicly with the
Israeli Companies Registrar or the Israel Securities Authority. These documents are publicly available and may be found and inspected at the Israeli Registrar
of Companies. In addition, shareholders may request to be provided with any document related to an action or transaction requiring shareholder approval
under the related party transaction provisions of the Companies Law. We may deny this request if we believe it has not been made in good faith or if such
denial is necessary to protect our interest or protect a trade secret or patent.
Modification of Class Rights
Under the Companies Law and our articles, the rights attached to any class of share, such as voting, liquidation and dividend rights, may be amended
by adoption of a resolution by the holders of a majority of the shares of that class present at a separate class meeting, or otherwise in accordance with the
rights attached to such class of shares, as set forth in our articles.
Registration Rights
For a discussion of registration rights that we granted to certain of our existing shareholders prior to our IPO, please see “ITEM 7.B Related Party
Transactions— Registration Rights.”
Acquisitions under Israeli Law
Full Tender Offer.
A person wishing to acquire shares of an Israeli public company and who would as a result hold over 90% of the target company’s issued and
outstanding share capital is required by the Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued
and outstanding shares of the company. A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the issued
and outstanding share capital of a certain class of shares is required to make a tender offer to all of the shareholders who hold shares of the relevant class for
the purchase of all of the issued and outstanding shares of that class. If the shareholders who do not accept the offer hold less than 5% of the issued and
outstanding share capital of the company or of the applicable class, and more than half of the shareholders who do not have a personal interest in the offer
accept the offer, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, a tender offer will also
be accepted if the shareholders who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable
class of shares.
92
Table of Contents
Upon a successful completion of such a full tender offer, any shareholder that was an offeree in such tender offer, whether such shareholder accepted
the tender offer or not, may, within six months from the date of acceptance of the tender offer, petition an Israeli court to determine whether the tender offer
was for less than fair value and that the fair value should be paid as determined by the court. However, under certain conditions, the offeror may include in the
terms of the tender offer that an offeree who accepted the offer will not be entitled to petition the Israeli court as described above.
If a tender offer is not accepted in accordance with the requirements set forth above, the acquirer may not acquire shares from shareholders who
accepted the tender offer that will increase its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class.
Special Tender Offer.
The Companies Law provides that an acquisition of shares of an Israeli public company must be made by means of a special tender offer if as a
result of the acquisition the purchaser would become a holder of 25% or more of the voting rights in the company. This requirement does not apply if there is
already another holder of at least 25% of the voting rights in the company. Similarly, the Companies Law provides that an acquisition of shares in a public
company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the
voting rights in the company, if there is no other shareholder of the company who holds more than 45% of the voting rights in the company, subject to certain
exceptions.
A special tender offer must be extended to all shareholders of a company but the offeror is not required to purchase shares representing more than
5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are tendered by shareholders. A special tender offer
may be consummated only if (i) the offeror acquired shares representing at least 5% of the voting power in the company and (ii) the number of shares
tendered by shareholders who accept the offer exceeds the number of shares held by shareholders who object to the offer (excluding the purchaser, controlling
shareholders, holders of 25% or more of the voting rights in the company or any person having a personal interest in the acceptance of the tender offer,
including their relatives and companies under their control). If a special tender offer is accepted, the purchaser or any person or entity controlling it or under
common control with the purchaser or such controlling person or entity may not make a subsequent tender offer for the purchase of shares of the target
company and may not enter into a merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or
entity undertook to effect such an offer or merger in the initial special tender offer.
Merger
The Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under the
Companies Law are met, by a majority vote of each party’s shareholders. In the case of the target company, approval of the merger further requires a majority
vote of each class of its shares.
For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the votes of shares
represented at the meeting of shareholders that are held by parties other than the other party to the merger, or by any person (or group of persons acting in
concert) who holds (or hold, as the case may be) 25% or more of the voting rights or the right to appoint 25% or more of the directors of the other party, vote
against the merger. If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder has a personal
interest in the merger, then the merger is instead subject to the same Special Majority approval that governs all extraordinary transactions with controlling
shareholders (as described under “ITEM 6.C Board Practices —Approval of Related Party Transactions under Israeli Law—Disclosure of Personal Interests
of Controlling Shareholders and Approval of Certain Transactions.”)
93
Table of Contents
If the transaction would have been approved by the shareholders of a merging company but for the separate approval of each class or the exclusion
of the votes of certain shareholders as provided above, a court may still approve the merger upon the petition of holders of at least 25% of the voting rights of
a company. For such petition to be granted, the court must find that the merger is fair and reasonable, taking into account the respective values assigned to
each of the parties to the merger and the consideration offered to the shareholders of the target company.
Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a
reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of the merging entities, and may further give
instructions to secure the rights of creditors.
In addition, a merger may not be consummated unless at least 50 days have passed from the date on which a proposal for approval of the merger is
filed with the Israeli Registrar of Companies and at least 30 days have passed from the date on which the merger was approved by the shareholders of each
party.
Anti-takeover Measures under Israeli Law
The Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including shares
providing certain preferred rights with respect to voting, distributions or other matters and shares having preemptive rights. No preferred shares are authorized
under our articles. In the future, if we do authorize, create and issue a specific class of preferred shares, such class of shares, depending on the specific rights
that may be attached to it, may have the ability to frustrate or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium
over the market value of their ordinary shares. The authorization and designation of a class of preferred shares will require an amendment to our articles,
which requires the prior approval of the holders of a majority of the voting power attaching to our issued and outstanding shares at a general meeting. The
convening of the meeting, the shareholders entitled to participate and the majority vote required to be obtained at such a meeting will be subject to the
requirements set forth in the Companies Law as described above in “—Voting Rights.”
Borrowing Powers
Pursuant to the Companies Law and our articles, our board of directors may exercise all powers and take all actions that are not required under law
or under our articles to be exercised or taken by our shareholders, including the power to borrow money for company purposes.
Changes in Capital
Our articles enable us to increase or reduce our share capital. Any such changes are subject to Israeli law and must be approved by a resolution duly
passed by our shareholders at a general meeting by voting on such change in the capital. In addition, transactions that have the effect of reducing capital, such
as the declaration and payment of dividends in the absence of sufficient retained earnings or profits, require the approval of both our board of directors and an
Israeli court.
C. Material Contracts
We have not entered into any material contract within the two years prior to the date of this annual report, other than contracts entered into in the
ordinary course of business, or as otherwise described below in this ITEM 10.C.
Underwriting Agreement for IPO
We entered into an underwriting agreement, dated March 30, 2015, with Barclays Capital Inc. and Citigroup Global Markets Inc., as representatives
of the underwriters for our IPO, with respect to the ordinary shares sold in our IPO. We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of such liabilities.
94
Table of Contents
Agreements with Amazon
Master Purchase Agreement
On January 10, 2017, we entered into a Master Purchase Agreement, or the Purchase Agreement, with Amazon Corporate LLC, a subsidiary of
Amazon.com, Inc., or Amazon. Under the Purchase Agreement, Amazon may purchase and we have committed to supply Avalanche 1000 digital direct-to-
garment printers and NeoPigment ink and other consumables at agreed upon prices which are subject to volume. We also agreed to provide maintenance
services and extended warranties to Amazon at agreed prices.
The Purchase Agreement provides for an “end of life” program. We are required to notify Amazon 12 months in advance if it intends to stop
supporting one of the products or services supplied by us and to continue to manufacture the product or provide such service during the applicable period.
Subject to certain exceptions, we are required to continue to supply ink in such quantities as Amazon requires for at least 36 months after the earlier of (1) the
end of the term of the Purchase Agreement or (2) 18 months following the purchase of the last product sold pursuant to the Purchase Agreement. The
Purchase Agreement requires us to make arrangements to ensure continuity of our supply of products if we do not comply with its requirements to supply the
products or the services under the agreement or becomes insolvent. The Purchase Agreement also provides for penalties on a sliding scale in the case of late
delivery or if our systems are unavailable for certain specific periods. There are no minimum spending commitments under the Purchase Agreement. The
term of the Purchase Agreement is five years beginning on May 1, 2016 and extends automatically for additional one year periods unless terminated by
Amazon.
Transaction Agreement and Warrant
Concurrently with the Purchase Agreement, we and Amazon entered into a Transaction Agreement, or the Transaction Agreement, pursuant to which
we agreed to issue to an affiliate of Amazon a warrant, or the Warrant to acquire up to 2,932,176 of our ordinary shares, or the Warrant Shares, at a purchase
price of $13.03 per share which is based on the preceding 30 trading day VWAP prior to the execution of the Transaction Agreement. The Warrant also
provides for cashless exercise.
Under the terms of the Warrant, the ordinary shares underlying the Warrant are subject to vesting as a function of payments for purchased products
and services of up to $150 million over a five year period with the shares vesting incrementally each time Amazon (which includes its affiliates for purposes
of the vesting determination) makes a payment totaling $5 million to us. Warrant Shares vest in increments of 85,521 shares until such time as Amazon has
paid an aggregate of $75 million to us and thereafter the remaining Warrant Shares vest in additional increments of 109,956 shares each. Based on payments
made by Amazon prior to the date of the Warrant, some of the Warrant Shares have vested at the time of the execution of the Purchase Agreement. As of
December 31, 2017, warrants to purchase 513,126 shares have vested.
The Warrant is exercisable through January 10, 2022. Upon the consummation of a change of control transaction (as defined in the Warrant), subject
to certain exceptions, the unvested portion of the Warrant will vest in full and become fully exercisable.
The exercise price and the number of Warrant Shares issuable upon exercise of the Warrant are subject to customary anti-dilution adjustments.
The Transaction Agreement includes customary representations, warranties and covenants of our company and Amazon. The Transaction Agreement
restricts any transfer of the Warrant except to a wholly owned subsidiary of Amazon and contains certain restrictions on Amazon’s ability to transfer the
Warrant Shares, including to a beneficial owner of more than 5% of our outstanding ordinary shares, subject to customary exceptions. The Transaction
Agreement also contains certain customary standstill restrictions with respect to an acquisition of our shares (other than an acquisition of the Warrant Shares),
solicitation of proxies and other actions that seek to influence the control of our company. These standstill restrictions remain in effect until such time as the
Warrant Shares held by Amazon or that remain unexercised under the Warrant represent less than 2% of our outstanding shares.
95
Table of Contents
Under the Transaction Agreement, Amazon is entitled to certain registration rights. At any time after the one year anniversary of the Transaction
Agreement (1) Amazon may request up to two times in any 12-month period that we file a shelf registration statement on Form F-3 or S-3 and we are
required to keep the shelf registration effective for four 90-day periods, (2) if we are ineligible to file a registration statement on Form F-3 or Form S-3,
Amazon may request up to four times that we file a long form registration statement to facilitate the sale of its shares, and (3) Amazon is entitled to piggyback
registration rights on underwritten offerings effected by us. We are subject to customary obligations upon Amazon’s request for registration, including
cooperation in case of an underwritten offering.
Underwriting Agreement for Secondary and Follow-On Offering
We entered into an underwriting agreement, dated January 25, 2017, with Fortissimo Capital, Mr. Gabi Seligsohn, Barclays Capital Inc. and
Citigroup Global Markets Inc., as representatives of the underwriters, with respect to the ordinary shares sold by Fortissimo Capital and Mr. Seligsohn and by
us in our secondary and follow-on offering. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities
Act, and to contribute to payments the underwriters may be required to make in respect of such liabilities.
Underwriting Agreement for Secondary Offering
We entered into an underwriting agreement, dated May 16, 2017, with Fortissimo Capital, Barclays Capital Inc. and Citigroup Global Markets Inc.,
as representatives of the underwriters, with respect to the ordinary shares sold by Fortissimo Capital in its secondary offering. We have agreed to indemnify
the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to
make in respect of such liabilities.
Other Material Contracts
Material Contract
Amended and Restated Investors’ Rights Agreement, dated March 18, 2015,
between us and the parties thereto
“ITEM 7.B. Related Party Transaction—Investors’ Rights Agreement.”
Location in This Annual Report
Agreements and arrangements with, and compensation of, directors and
executive officers
“ITEM 7.B. Related Party Transactions—Agreements and arrangements
with, and compensation of, directors and executive officers.”
Kornit Digital Compensation Policy
“ITEM 6.C. Board Practices-Board Committees-Compensation Committee
and Compensation Policy.”
OEM Supply Agreement, dated December 3, 2015, between us and FujiFilm
Dimatix, Inc.
“ITEM 4.B. Business Overview— Manufacturing, Inventory and Suppliers-
Inventory and Suppliers.”
Manufacturing Services Agreement, dated as of May 2015, between us and
Flextronics (Israel) Ltd.
“ITEM 4.B. Business Overview— Manufacturing, Inventory and Suppliers-
Manufacturing.”
Office and Parking Space Lease Agreement, dated as of December 17, 2007
between us and Industrial Building Corporation, as amended
“ITEM 4.D. Property, Plants and Equipment.”
Agreement, dated as of December 22, 2016, between us and B.G. (Israel)
Technologies Ltd.
“ITEM 4.B. Business Overview— Manufacturing, Inventory and Suppliers-
Inventory and Suppliers.”
Lease Agreement dated as of March 25, 2010 between us and Benbenisti
Engineering Ltd., as amended
“ITEM 4.D. Property, Plants and Equipment.”
Lease dated December 2017 between Bonanno Real Estate Group I, L.P. and
Kornit Digital North America, Inc.
“ITEM 4.D. Property, Plants and Equipment.”
96
Table of Contents
D. Exchange Controls
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the
proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding some transactions. However,
legislation remains in effect under which currency controls can be imposed by administrative action at any time.
The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with
Israel, is not restricted in any way by our articles or by the laws of the State of Israel.
E. Taxation
Israeli Tax Considerations
The following is a brief summary of the material Israeli tax consequences concerning the ownership and disposition of our ordinary shares by our
shareholders. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal
investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of such investors include residents of Israel or
traders in securities who are subject to special tax regimes not covered in this discussion. Because parts of this discussion are based on new tax legislation that
has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the
views expressed in this discussion. The discussion below is subject to change, including due to amendments under Israeli law or changes to the applicable
judicial or administrative interpretations of Israeli law, which change could affect the tax consequences described below.
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders.
Israeli capital gains tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or
rights to shares in an Israeli resident company, or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a specific exemption is available
or unless a tax treaty between Israel and the seller’s country of residence provides otherwise. Capital gain is generally subject to tax at the corporate tax rate
(25% in 2016, 24% in 2017 and 23% in 2018 and thereafter), if generated by a company, or at the rate of 25% if generated by an individual, or 30% in the
case of sale of shares by a Substantial Shareholder (i.e., a person who holds, directly or indirectly, alone or together with such person’s relative or another
person who collaborates with such person on a permanent basis, 10% or more of any of the company’s “means of control” (including, among other things, the
right to receive profits of the company, voting rights, the right to receive proceeds upon liquidation and the right to appoint a director)) at the time of sale or at
any time during the preceding 12-month period. Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to
business income (a corporate tax rate for a corporation and a marginal tax rate of up to 47% for an individual in 2017) unless the benefiting provisions of an
applicable treaty applies.
Notwithstanding the foregoing, a non-Israeli resident (individual or corporation) who derives capital gains from the sale of shares in an Israeli
resident company that were purchased after the company was listed for trading on a recognized stock exchange in Israel or outside of Israel will generally be
exempt from Israeli tax so long as the shares were not held through a permanent establishment that the non-resident maintains in Israel (and with respect to
shares listed on a recognized stock exchange outside of Israel, so long as neither the shareholder nor the particular capital gain is otherwise subject to the
Israeli Income Tax Law (Inflationary Adjustments) 5745-1985). However, non-Israeli corporations will not be entitled to the foregoing exemption if Israeli
residents: (i) have a controlling interest of more than 25% in such non-Israeli corporation or (ii) are the beneficiaries of, or are entitled to, 25% or more of the
revenues or profits of such non-Israeli corporation, whether directly or indirectly. These provisions dealing with capital gain are not applicable to a person
whose gains from selling or otherwise disposing of the shares are deemed to be business income.
97
Table of Contents
Additionally, a sale of shares by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty.
For example, under the United States-Israel Tax Treaty, the sale, exchange or other disposition of shares of an Israeli company by a shareholder who (i) is a
U.S. resident (for purposes of the treaty), (ii) holds the shares as a capital asset, and (iii) is entitled to claim the benefits afforded to such person by the treaty,
is generally exempt from Israeli capital gains tax. Such exemption will not apply if: (i) the capital gain arising from such sale, exchange or disposition is
attributed to real estate located in Israel; (ii) the capital gain arising from such sale, exchange or disposition is attributed to royalties; (iii) the capital gain
arising from the sale, exchange or disposition that can be attributed to a permanent establishment of the shareholder that is maintained in Israel under certain
terms; (iv) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting rights during any part of the 12-month period preceding
such sale exchange or other disposition, subject to certain conditions; or (v) such U.S. resident is an individual and was present in Israel for a period or
periods aggregating to 183 days or more during the relevant taxable year. In any such case, the sale, exchange or disposition of our ordinary shares would be
subject to Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, a U.S. resident would be permitted to claim a credit for such
taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations under U.S. law applicable to
foreign tax credits. The United States-Israel Tax Treaty does not relate to U.S. state or local taxes.
In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to
avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, such as a
merger or other transaction, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by
that authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli residents, and, in the absence of such
declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
Taxation of Non-Israeli Shareholders on Receipt of Dividends.
Non-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on our
ordinary shares at the rate of 25% or 30% (if the recipient is a Substantial Shareholder at the time of receiving the dividend or at any time during the
preceding 12 months) or 15% if the dividend is distributed from income attributed to a Benefited Enterprise and 20% with respect to a Preferred Enterprise,
subject to certain conditions. Such dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares are registered with a
nominee company (whether the recipient is a substantial Shareholder or not) and 15% if the dividend is distributed from income attributed to a Benefited
Enterprise or 20% if the dividend is distributed from income attributed to an Preferred Enterprise, unless a reduced rate is provided under an applicable tax
treaty (subject to the receipt of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
For example, under the United States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our
ordinary shares who is a U.S. resident (for purposes of the United States-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax
for dividends not generated by a Benefited Enterprise and paid to a U.S. corporation holding 10% or more of the outstanding voting rights from the start of
the tax year preceding the distribution of the dividend through (and including) the distribution of the dividend, is 12.5%, provided that not more than 25% of
the gross income for such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, a distribution of dividends to non-
Israeli residents is subject to withholding tax at source at a rate of 15% if the dividend is distributed from income attributed to a Benefited Enterprise for such
U.S. corporation shareholder, provided that the condition related to our gross income for the previous year (as set forth in the previous sentence) is met. U.S.
residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for United States federal income tax purposes in the
amount of the taxes withheld, subject to detailed rules contained in U.S. tax legislation.
If the dividend is attributable partly to income derived from a Benefited Enterprise or a Preferred Enterprise, and partly from other sources of
income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income.
98
Table of Contents
Estate and Gift Tax.
Israeli law presently does not impose estate or gift taxes.
Excess Tax.
Beginning on January 1, 2013, an additional tax liability at the rate of 2% was added to the applicable tax rate on the annual taxable income of
individuals (whether any such individual is an Israeli resident or non-Israeli resident) exceeding NIS 803,520 (in 2018) which amount is linked to the annual
change in the Israeli consumer price index, including, but not limited to, dividends, interest and capital gain. Pursuant to new legislation enacted recently, as
of 2017, such tax rate was increased to 3% on annual income exceeding NIS 640,000 (NIS 641,880 in 2018) (which amount is linked to the annual change in
the Israeli consumer price index).
U.S. Federal Income Taxation
The following is a description of the material U.S. federal income tax consequences to U.S. Holders (as defined below) of the acquisition, ownership
and disposition of our ordinary shares. This description addresses only the U.S. federal income tax consequences to purchasers of our ordinary shares and that
will hold such ordinary shares as capital assets. This description does not address tax considerations applicable to holders that may be subject to special tax
rules, including, without limitation:
● banks, financial institutions or insurance companies;
● real estate investment trusts, regulated investment companies or grantor trusts;
● dealers or traders in securities, commodities or currencies;
● tax-exempt entities;
● certain former citizens or long-term residents of the United States;
● persons that received our ordinary shares as compensation for the performance of services;
● persons that will hold our ordinary shares as part of a “hedging,” “integrated” or “conversion” transaction or as a position in a “straddle” for
U.S. federal income tax purposes;
● partnerships (including entities classified as partnerships for U.S. federal income tax purposes) or other pass-through entities, or holders that will
hold our ordinary shares through such an entity;
● U.S. Holders (as defined below) whose “functional currency” is not the U.S. dollar; or
● holders that own directly, indirectly or through attribution 10.0% or more of the voting power or value of our ordinary shares.
Moreover, this description does not address the United States federal estate, gift, alternative minimum tax or net investment income tax
consequences, or any state, local or non-U.S. tax consequences, of the acquisition, ownership and disposition of our ordinary shares.
This description is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, existing, proposed and temporary U.S. Treasury
Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. Each of the foregoing is subject
to change, which change could apply retroactively and could affect the tax consequences described below. There can be no assurances that the U.S. Internal
Revenue Service will not take a different position concerning the tax consequences of the acquisition, ownership and disposition of our ordinary shares or that
such a position would not be sustained.
99
Table of Contents
For purposes of this description, a “U.S. Holder” is a beneficial owner of our ordinary shares that, for U.S. federal income tax purposes, is:
● a citizen or resident of the United States;
● a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the
United States or any state thereof, including the District of Columbia;
● an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
● a trust if such 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 its administration and (2) one or more U.S. persons have the authority to control all of the
substantial decisions of such trust.
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds ordinary shares, the tax treatment of a partner
in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax
advisor as to its tax consequences.
You should consult your tax advisor with respect to the U.S. federal, state, local and foreign tax consequences of acquiring, owning and
disposing of our ordinary shares.
Distributions
Subject to the discussion below under “— Passive Foreign Investment Company Considerations,” if you are a U.S. Holder, the gross amount of any
distribution that we pay you with respect to our ordinary shares before reduction for any non-U.S. taxes withheld therefrom generally will be includible in
your income as dividend income to the extent such distribution is paid out of our current or accumulated earnings and profits as determined under U.S. federal
income tax principles. To the extent that the amount of any cash distribution exceeds our current and accumulated earnings and profits as determined under
U.S. federal income tax principles, it will be treated first as a tax free return of your adjusted tax basis in our ordinary shares and thereafter as capital gain. We
do not expect to maintain calculations of our earnings and profits under U.S. federal income tax principles. Therefore, if you are a U.S. Holder, you should
expect that the entire amount of any cash distribution generally will be reported as dividend income to you; provided, however, that distributions of ordinary
shares to U.S. Holders that are part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax. Non-corporate
U.S. Holders may qualify for the lower rates of taxation with respect to dividends on ordinary shares applicable to long term capital gains (i.e., gains from the
sale of capital assets held for more than one year), provided that certain conditions are met, including certain holding period requirements and the absence of
certain risk reduction transactions. Moreover, such reduced rate shall not apply if we are a PFIC for the taxable year in which it pays a dividend, or were a
PFIC for the preceding taxable year. Dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders.
If you are a U.S. Holder, subject to the discussion below, dividends that we pay you with respect to our ordinary shares will be treated as foreign
source income, which may be relevant in calculating your foreign tax credit limitation. Subject to certain conditions and limitations, non-U.S. tax withheld on
dividends may be deducted from your taxable income or credited against your U.S. federal income tax liability. The limitation on foreign taxes eligible for
credit is calculated separately with respect to specific classes of income. For this purpose, dividends that we distribute generally should constitute “passive
category income,” or, in the case of certain U.S. Holders, “general category income.” A foreign tax credit for foreign taxes imposed on distributions may be
denied if you do not satisfy certain minimum holding period requirements. The rules relating to the determination of the foreign tax credit are complex, and
you should consult your tax advisor to determine whether and to what extent you will be entitled to this credit.
100
Table of Contents
Although, as discussed above, dividends that we pay to a U.S. Holder will generally be treated as foreign source income, for periods in which we are
a “United States-owned foreign corporation,” a portion of dividends paid by us may be treated as U.S. source income solely for purposes of the foreign tax
credit. We would be treated as a United States-owned foreign corporation if 50% or more of the total value or total voting power of our stock is owned,
directly, indirectly or by attribution, by United States persons. To the extent any portion of our dividends is treated as U.S. source income pursuant to this rule,
the ability of a U.S. Holder to claim a foreign tax credit for any Israeli withholding taxes payable in respect of our dividends may be limited. A U.S. Holder
entitled to benefits under the United States-Israel Tax Treaty may, however, elect to treat any dividends as foreign source income for foreign tax credit
purposes if the dividend income is separated from other income items for purposes of calculating the U.S. Holder’s foreign tax credit. U.S. Holders should
consult their own tax advisors about the impact of, and any exception available to, the special sourcing rule described in this paragraph, and the desirability of
making, and the method of making, such an election.
The amount of any dividend income paid in NIS will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of
receipt, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you
should not be required to recognize exchange gain or loss in respect of the dividend income. You may have exchange gain or loss if the dividend is converted
into U.S. dollars after the date of receipt. Exchange gain or loss will be treated as U.S.-source ordinary income or loss.
Sale, Exchange or Other Disposition of Ordinary Shares
Subject to the discussion above under “— Passive Foreign Investment Company Considerations,” if you are a U.S. Holder, you generally will
recognize an amount of gain or loss on the sale, exchange or other disposition of our ordinary shares equal to the difference between the amount realized on
such sale, exchange or other disposition and your tax basis in our ordinary shares, and such gain or loss will be capital gain or loss. The tax basis in an
ordinary share generally will equal the U.S. dollar cost of such ordinary share. If you are a non-corporate U.S. Holder, capital gain from the sale, exchange or
other disposition of ordinary shares generally will be eligible for a preferential rate of taxation applicable to capital gains, if your holding period for such
ordinary shares exceeds one year. The deductibility of capital losses for U.S. federal income tax purposes is subject to limitations under the Code. Any such
gain or loss that a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes.
If an Israeli tax is imposed on the sale or other disposition of our ordinary shares, your amount realized will include the gross amount of the proceeds
of the sale or other disposition before deduction of the Israeli tax. Because your gain from the sale or other disposition of our ordinary shares will generally be
U.S.-source gain, and you may use foreign tax credits to offset only the portion of U.S. federal income tax liability that is attributable to foreign source
income, you may be unable to claim a foreign tax credit with respect to the Israeli tax, if any, on gains. You should consult your tax adviser as to whether the
Israeli tax on gains may be creditable against your U.S. federal income tax on foreign-source income from other sources.
Passive Foreign Investment Company Considerations
If we were to be classified as a “passive foreign investment company,” or PFIC, in any taxable year, a U.S. Holder would be subject to special rules
generally intended to reduce or eliminate any benefits from the deferral of U.S. federal income tax that a U.S. Holder could derive from investing in a non-
U.S. company that does not distribute all of its earnings on a current basis.
A non-U.S. corporation will be classified as a PFIC for federal income tax purposes in any taxable year in which, after applying certain look through
rules, either
● at least 75% of its gross income is “passive income”; or;
● at least 50% of the average quarterly value of its gross assets (which may be determined in part by the market value of our ordinary shares,
which is subject to change) is attributable to assets that produce “passive income” or are held for the production of passive income;
101
Table of Contents
Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions, the excess
of gains over losses from the disposition of assets which produce passive income, and includes amounts derived by reason of the temporary investment of
funds raised in offerings of our ordinary shares. If a non-U.S. corporation owns at least 25% by value of the stock of another corporation, the non-U.S.
corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving directly its
proportionate share of the other corporation’s income. If we are classified as a PFIC in any year with respect to which a U.S. Holder owns our ordinary shares,
our ordinary shares generally will continue to be treated as shares in a PFIC with respect to such U.S. Holder in all succeeding years during which the U.S.
Holder owns our ordinary shares, regardless of whether we continue to meet the tests described above.
Based on certain estimates of our gross income and gross assets and the nature of our business, we believe that we were not classified as a PFIC for
the taxable year ended December 31, 2017, and furthermore do not expect to be classified for the taxable year ending December 31, 2018. Because PFIC
status must be determined annually based on tests which are factual in nature, our PFIC status in future years will depend on our income, assets and activities
in those years. In addition, because the market price of our ordinary shares is likely to fluctuate and because that market price may affect the determination of
whether we will be considered a PFIC, there can be no assurance that we will not be considered a PFIC for any taxable year and we do not intend to make a
determination of our or any of our future subsidiaries’ PFIC status in the future. A U.S. Holder may be able to mitigate some of the adverse U.S. federal
income tax consequences described below with respect to owning our ordinary shares if we are classified as a PFIC for our taxable year ending December 31,
2017, provided that such U.S. Holder is eligible to make, and successfully makes, either a “mark-to-market” election or a qualified electing fund election
described below for the taxable year in which its holding period begins.
If we were a PFIC, and you are a U.S. Holder, then unless you make one of the elections described below, a special tax regime, which we refer to as
the Excess Distribution Regime, will apply to both (a) any “excess distribution” by us to you (generally, your ratable portion of distributions in any year
which are greater than 125% of the average annual distribution received by you in the shorter of the three preceding years or your holding period for our
ordinary shares) and (b) any gain realized on the sale or other disposition of our ordinary shares. Under the Excess Distribution Regime, any excess
distribution and realized gain will be treated as ordinary income and will be subject to tax as if (a) the excess distribution or gain had been realized ratably
over your holding period, (b) the amount deemed realized in each year had been subject to tax in each year of that holding period at the highest marginal rate
for such year (other than income allocated to the current period or any taxable period before we became a PFIC, which would be subject to tax at the U.S.
Holder’s regular ordinary income rate for the current year and would not be subject to the interest charge discussed below), and (c) the interest charge
generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in those years. Certain elections may be available
that would result in an alternative treatment of our ordinary shares. If we are determined to be a PFIC, the Excess Distribution Regime described in this
paragraph would also apply to indirect distributions and gains deemed to be realized by U.S. Holders in respect of any future subsidiary of ours that also may
be determined to be PFICs.
If we are a PFIC for any taxable year during which a U.S. Holder holds our ordinary shares, then in lieu of being subject to the tax and interest
charge rules discussed above, a U.S. Holder may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method,
provided that such ordinary shares are “regularly traded” on a “qualified exchange.” In general, our ordinary shares will be treated as “regularly traded” for a
given calendar year if more than a de minimis quantity of our ordinary shares are traded on a qualified exchange on at least 15 days during each calendar
quarter of such calendar year. Although the IRS has not published any authority identifying specific exchanges that may constitute “qualified exchanges,”
Treasury Regulations provide that a qualified exchange is (a) a United States securities exchange that is registered with the SEC, (b) the United States market
system established pursuant to section 11A of the Securities and Exchange Act of 1934, or (c) a non-U.S. securities exchange that is regulated or supervised
by a governmental authority of the country in which the market is located, provided that (i) such non-U.S. exchange has trading volume, listing, financial
disclosure, surveillance and other requirements designed to prevent fraudulent and manipulative acts and practices, to remove impediments to and perfect the
mechanism of a free and open, fair and orderly, market, and to protect investors; and the laws of the country in which such non-U.S. exchange is located and
the rules of such non-U.S. exchange ensure that such requirements are actually enforced and (ii) the rules of such non-U.S. exchange effectively promote
active trading of listed stocks. Our ordinary shares are listed on the NASDAQ Global Select Market, which is a United States securities exchange that is
registered with the SEC. However, no assurance can be given that our ordinary shares meet the requirements to be treated as “regularly traded” for purposes
of the mark-to-market election. In addition, because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may
continue to be subject to the Excess Distribution Regime with respect to such holder’s indirect interest in any investments held by us that are treated as an
equity interest in a PFIC for U.S. federal income tax purposes, including stock in any future subsidiary of ours that is treated as a PFIC.
102
Table of Contents
If a U.S. Holder makes an effective mark-to-market election, such U.S. Holder will include in each year that we are a PFIC as ordinary income the
excess of the fair market value of such U.S. Holder’s ordinary shares at the end of the year over such U.S. Holder’s adjusted tax basis in our ordinary shares.
Such U.S. Holder will be entitled to deduct as an ordinary loss in each such year the excess of such U.S. Holder’s adjusted tax basis in our ordinary shares
over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market
election. A U.S. Holder will not mark-to-market gain or loss for any taxable year in which we are not classified as a PFIC. If a U.S. Holder makes an effective
mark-to-market election, in each year that we are a PFIC, any gain such U.S. Holder recognizes upon the sale or other disposition of such U.S. Holder’s
ordinary shares will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount of previously included
income as a result of the mark-to-market election.
A U.S. Holder’s adjusted tax basis in our ordinary shares will be increased by the amount of any income inclusion and decreased by the amount of
any deductions under the mark-to-market rules. If a U.S. Holder makes a mark-to market election, it will be effective for the taxable year for which the
election is made and all subsequent taxable years unless our ordinary shares are no longer regularly traded on a qualified exchange or the IRS consents to the
revocation of the election. U.S. Holders are urged to consult their tax advisers about the availability of the mark-to-market election, and whether making the
election would be advisable in their particular circumstances.
Where a company that is a PFIC meets certain reporting requirements, a U.S. Holder can avoid certain adverse PFIC consequences described above
by making a “qualified electing fund,” or QEF, election to be taxed currently on its proportionate share of the PFIC’s ordinary income and net capital gains.
Generally, a QEF election should be made on or before the due date for filing a U.S. Holder’s federal income tax return for the first taxable year in which it
held our ordinary shares. If a timely QEF election is made, an electing U.S. Holder of our ordinary shares will be required to include in its ordinary income
such U.S. Holder’s pro rata share of our ordinary earnings and to include in its long-term capital gain income such U.S. Holder’s pro rata share of our net
capital gain, whether or not distributed. Under Section 1293 of the Code, a U.S. Holder’s pro rata share of our ordinary income and net capital gain is the
amount which would have been distributed with respect to such U.S. Holder’s ordinary shares if, on each day during our taxable year, we had distributed to
each holder of our ordinary shares a pro rata share of that day’s ratable share of our ordinary earnings and net capital gain for such year. In certain cases in
which a QEF does not distribute all of its earnings in a taxable year, its U.S. Holders may also be permitted to elect to defer payment of some or all of the
taxes on the QEF’s undistributed income but will then be subject to an interest charge on the deferred amount.
We intend to provide, upon request, all information that a U.S. Holder making a QEF election is required to obtain for U.S. federal income tax
purposes (e.g., the U.S. Holder’s pro rata share of ordinary income and net capital gain), and intend to provide, upon request, a “PFIC Annual Information
Statement” as described in Treasury Regulation section 1.1295-1 (or in any successor IRS release or Treasury regulation), including all representations and
statements required by such statement. U.S. Holders should consult their tax advisors to determine whether any of these elections would be available and if
so, what the consequences of the alternative treatments would be in their particular circumstances.
If a U.S. Holder owns our ordinary shares during any year in which we are a PFIC, the U.S. Holder generally will be required to file an IRS Form
8621 with respect to us, generally with the U.S. Holder’s federal income tax return for that year.
U.S. Holders should consult their tax advisors regarding whether we are a PFIC and the potential application of the PFIC rules.
103
Table of Contents
Disposition of Foreign Currency
Foreign currency received as dividends on our ordinary shares or on the sale or retirement of an ordinary share will have a tax basis equal to its U.S.
dollar value at the time the foreign currency is received. Foreign currency that is purchased will generally have a tax basis equal to the U.S. dollar value of the
foreign currency on the date of purchase. Any gain or loss recognized on a sale or other disposition of a foreign currency (including upon exchange for U.S.
dollars) will be U.S. source ordinary income or loss.
Tax on Net Investment Income
A U.S. Holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from the tax, will be subject to a
3.8% tax on the lesser of (1) the U.S. Holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. Holder’s modified adjusted
gross income for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and $250,000, depending on the
individual’s circumstances). A U.S. Holder’s net investment income generally will include its dividends on our ordinary shares and net gains from
dispositions of our ordinary shares, unless those dividends or gains are derived in the ordinary course of the conduct of trade or business (other than trade or
business that consists of certain passive or trading activities). Net investment income, however, may be reduced by deductions properly allocable to that
income. A U.S. Holder that is an individual, estate or trust is urged to consult its tax adviser regarding the applicability of the Medicare tax to its income and
gains in respect of its investment in the ordinary shares.
Backup Withholding Tax and Information Reporting Requirements
U.S. backup withholding tax and information reporting requirements may apply to certain payments to certain holders of our ordinary shares.
Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, our ordinary shares made within the
United States, or by a U.S. payor or U.S. middleman, to a holder of our ordinary shares, other than an exempt recipient (including a payee that is not a U.S.
person that provides an appropriate certification and certain other persons). A payor will be required to withhold backup withholding tax from any payments
of dividends on, or the proceeds from the sale or redemption of, ordinary shares within the United States, or by a U.S. payor or U.S. middleman, to a holder,
other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an
exemption from, such backup withholding tax requirements. Any amounts withheld under the backup withholding rules will be allowed as a credit against the
beneficial owner’s U.S. federal income tax liability, if any, and any excess amounts withheld under the backup withholding rules may be refunded, provided
that the required information is timely furnished to the IRS.
Foreign Asset Reporting
Certain U.S. Holders who are individuals are required to report information relating to an interest in our ordinary shares, subject to certain exceptions
(including an exception for shares held in accounts maintained by financial institutions). U.S. Holders are urged to consult their tax advisors regarding their
information reporting obligations, if any, with respect to their ownership and disposition of our ordinary shares.
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.
104
Table of Contents
H. Documents on Display
We are currently subject to the informational requirements of the Exchange Act applicable to foreign private issuers and fulfill the obligations of
these requirements by filing reports with the SEC. As a foreign private issuer, we are exempt from the rules under the Exchange Act relating to the furnishing
and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial
statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we intend to file
with the SEC, within 120 days after the end of each subsequent fiscal year, an annual report on Form 20-F containing financial statements which will be
examined and reported on, with an opinion expressed, by an independent public accounting firm. We also intend to furnish to the SEC reports on Form 6-K
containing quarterly unaudited financial information for the first three quarters of each fiscal year.
You may read and copy any document we file with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F
Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC
also maintains an Internet website that contains reports and other information regarding issuers that file electronically with the SEC. Our filings with the SEC
are also available to the public through the SEC’s website at http://www.sec.gov. As permitted under NASDAQ Stock Market Rule 5250(d)(1)(C), we will
post our annual reports filed with the SEC on our website at http://www.kornit.com. We will furnish hard copies of such reports to our shareholders upon
request free of charge. The information contained on our website is not part of this or any other report filed with or furnished to the SEC.
I.
Subsidiary Information
Not applicable.
ITEM 11.
Quantitative and Qualitative Disclosures About Market Risks.
We are exposed to a variety of financial risks, including market risk (including foreign exchange risk and price risk), credit and interest risks and
liquidity risk. Our overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on
our financial performance.
Foreign Currency Exchange Risk
Due to our international operations, currency exchange rates impact our financial performance. In 2017, approximately 84% of our revenues were
denominated in U.S. dollars and 16% of our revenues were denominated in Euros. Conversely, in 2017, approximately 44% of our purchases of raw materials
and components of our systems and ink and other consumables are denominated in either NIS or in NIS prices that are linked to U.S. dollars. Similarly, a
majority of our operating costs, which are largely comprised of labor costs, are denominated in NIS, due to our operations in Israel. Accordingly, our results
of operations may be materially affected by fluctuations in the value of the U.S. dollar relative to the NIS and the Euro.
105
Table of Contents
The following table presents information about the changes in the exchange rates of the NIS and the Euro against the U.S. dollar:
Period
2015
2016
2017
Change in Average
Exchange Rate
U.S. Dollar
against the
NIS
(%)
U.S. Dollar
against the
Euro
(%)
8.6
(1.1)
(6.3)
(16.5)
(0.3)
(1.9)
The figures above represent the change in the average exchange rate in the given period compared to the average exchange rate in the immediately
preceding period. Negative figures represent depreciation of the U.S. dollar compared to the NIS and positive figures represent appreciation of the U.S. dollar
compared to the NIS. We estimate that a 10% increase or decrease in the value of the NIS against the U.S. dollar would have decreased or increased our net
income by approximately by approximately $(0.9) or $0.9 million in 2016 and $(1.7) or $1.4 million in 2017. We estimate that a 10% increase or decrease in
the value of the Euro against the U.S. dollar would have decreased or increased our net income by approximately $(0.3) or $0.3 million in 2016 and $(0.8) or
$1.0 million in 2017. These estimates of the impact of fluctuations in currency exchange rates on our historic results of operations may be different from the
impact of fluctuations in exchange rates on our future results of operations since the mix of currencies comprising our revenues and expenses may change.
For purposes of our consolidated financial statements, local currency assets and liabilities are translated at the rate of exchange to the U.S. dollar on
the balance sheet date and local currency revenues and expenses are translated at the exchange rate at the date of the transaction or the average exchange rate
dollar during the reporting period to the United States.
To protect against an increase in the dollar-denominated value of expenses paid in NIS during the year, we have instituted a foreign currency cash
flow hedging program, which seeks to hedge a portion of the economic exposure associated with our anticipated NIS-denominated expenses using derivative
instruments. We intend to manage risks by using instruments such as foreign currency forward and swap contracts and other methods.
During 2016 and 2017, we entered into forward and option contracts to hedge against the risk of overall changes in future cash flow from payments
of payroll and related expenses denominated in NIS.
We expect that the substantial majority of our revenues will continue to be denominated in U.S. dollars for the foreseeable future and that a
significant portion of our expenses will continue to be denominated in NIS. We will continue to monitor exposure to currency fluctuations. However, we
cannot provide any assurances that our hedging activities will be successful in protecting us in full from adverse impacts from currency exchange rate
fluctuations. In addition, since we only plan to hedge a portion of our foreign currency exposure, our results of operations may be adversely affected due to
the impact of currency fluctuations on the unhedged aspects of our operations.
Interest Rate Risk
Our investment strategy is to achieve a return that will allow us to preserve capital and maintain liquidity requirements. We invest primarily in debt
securities, corporate debt securities. By policy, we limit the amount of credit exposure to any one issuer. As of December 31, 2016 and December 31, 2017,
unrealized losses on our marketable debt securities were primarily due to temporary interest rate fluctuations as a result of higher market interest rates
compared to interest rates at the time of purchase. We account for both fixed and variable rate securities at fair value with changes on gains and losses
recorded in the OCI until the securities are sold.
Other Market Risks
We do not believe that we have any material exposure to inflationary risks.
ITEM 12.
Description of Securities Other than Equity Securities.
Not applicable.
106
Table of Contents
ITEM 13.
Defaults, Dividend Arrearages and Delinquencies.
None.
ITEM 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds.
PART II
A. Use of Proceeds
Initial Public Offering
The effective date of the registration statement (File No. 333-202291) for our IPO was April 1, 2015. The offering commenced on March 18, 2015
and was closed on April 8, 2015. Barclays Capital Inc. and Citigroup Global Markets Inc. were joint book-running managers and representatives of the
underwriters for the offering. Barclays Capital Inc., Citigroup Global Markets Inc., William Blair & Company, L.L.C., Stifel, Nicolaus & Company,
Incorporated, Canaccord Genuity Inc. and Needham & Company, LLC were the underwriters for the offering. We registered 7,100,000 ordinary shares in the
offering and granted the underwriters a 30-day over-allotment option to purchase up to 1,065,000 additional shares from us to cover over-allotments. The
over-allotment was exercised in full by the underwriters.
At the closing of the IPO, we issued and sold a total of 8,165,000 ordinary shares at a price per share of $10.00 with aggregate gross proceeds of
$81.7 million. Under the terms of the offering, we incurred aggregate underwriting discounts of approximately $5.7 million and expenses of approximately
$2.4 million in connection with the offering, resulting in net proceeds to us of approximately $73.5 million.
From the effective date of the registration statement and until December 31, 2017, we had provided $18.7 million of the net proceeds of the IPO for
working capital.
We expect to use the balance of the net proceeds for working capital and general corporate purposes. The above may change based on the growth of
our business.
None of the net proceeds of the offering was paid directly or indirectly to any director or officer, of ours or to their associates, persons owning ten
percent or more of any class of our equity securities, or to any of our affiliates.
B.-D.
Not applicable.
ITEM 15.
Controls and Procedures.
(a) Disclosure Controls and Procedures
Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of December 31, 2017. Based on their evaluation, our
principal executive officer and principal financial officer concluded that as of December 31, 2017, our disclosure controls and procedures were effective such
that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management annual report on internal control over financial reporting
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures
that:
● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
107
Table of Contents
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on the financial statements.
Our management assessed the effectiveness of internal control over financial reporting as of December 31, 2017 based on the criteria established in
“Internal Control-Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2017.
(c) Attestation report of the independent registered public accounting firm
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over
financial reporting because the JOBS Act provides an exemption from such requirement, as we qualify as an emerging growth company.
(d) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the period covered by this annual report that have materially affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 16.
[Reserved]
ITEM 16A.
Audit Committee Financial Expert.
Our board of directors has determined that each of Lauri Hanover and Jerry Mandel, who serves on the audit committee of our board of directors and
who meets the “independent director” definition under the NASDAQ Listing Rules, qualifies as an “audit committee financial expert,” as defined under the
rules and regulations of the SEC, as well as our external director with “accounting and financial expertise” under the Companies Law.
ITEM 16B.
Code of Ethics.
We have adopted a code of ethics and business conduct applicable to our executive officers, directors and all other employees. A copy of the code is
delivered to every employee of our company, and is available to investors and others on our website at http://ir.kornit.com/ or by contacting our investor
relations department. Under Item 16B of Form 20-F, if a waiver or amendment of the code of ethics and business conduct applies to our principal executive
officer, principal financial officer, principal accounting officer, controller or other persons performing similar functions and relates to standards promoting any
of the values described in Item 16B(b) of Form 20-F, we will disclose such waiver or amendment (i) on our website within five business days following the
date of amendment or waiver in accordance with the requirements of Instruction 4 to such Item 16B or (ii) through the filing of a Form 6-K. No such
amendment was adopted, nor waiver provided, by us during the fiscal year ended December 31, 2017.
108
Table of Contents
ITEM 16C.
Principal Accountant Fees and Services.
Fees billed or expected to be billed by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global, and other members of Ernst & Young
Global for professional services for each of the last two fiscal years were as follows:
Audit fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
Year Ended December 31, 2016
Percentage
Amount
Year Ended December 31, 2017
Percentage
Amount
$
383
57
20
83% $
13%
4%
336
104
17
$
460
100% $
457
73%
23%
4%
100%
“Audit fees” are the aggregate fees billed for the audit of our annual financial statements. This category also includes services that generally the
independent accountant provides, such as consents and assistance with and review of documents filed with the SEC.
“Audit-related fees” are the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit and are
not reported under audit fees. These fees primarily include accounting consultations regarding the accounting treatment of matters that occur in the regular
course of business, implications of new accounting pronouncements and other accounting issues that occur from time to time.
“Tax fees” include fees for professional services rendered by our independent registered public accounting firm for tax compliance and tax advice on
actual or contemplated transactions.
“Other fees” include fees for services rendered by our independent registered public accounting firm with respect to government incentives and other
matters.
Audit Committee’s Pre-approval Policies and Procedures
Our audit committee follows pre-approval policies and procedures for the engagement of our independent accountant to perform certain audit and
non-audit services. Pursuant to those policies and procedures, which are designed to assure that such engagements do not impair the independence of our
auditors, the audit committee pre-approves annually a catalog of specific audit and non-audit services in the categories of audit service, audit-related service
and tax services that may be performed by our independent accountants.
ITEM 16D.
Exemptions from the Listing Standards for Audit Committees.
Not applicable.
ITEM 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Not applicable.
ITEM 16F.
Change in Registrant’s Certifying Accountant.
Not applicable.
109
Table of Contents
ITEM 16G. Corporate Governance.
The NASDAQ Global Select Market requires companies with securities listed thereon to comply with its corporate governance standards. As a
foreign private issuer, we are not required to comply with all of the rules that apply to listed domestic U.S. companies. Pursuant to NASDAQ Listing Rule
5615(a)(3), we have notified NASDAQ that with respect to the corporate governance practices described below, we instead follow Israeli law and practice
and accordingly will not follow the NASDAQ Listing Rules. Except for the differences described below, we do not believe there are any significant
differences between our corporate governance practices and those that apply to a U.S. domestic issuer under the NASDAQ corporate governance rules.
However, we may in the future decide to use the foreign private issuer exemption with respect to some or all of the other NASDAQ corporate governance
rules, in which case we will update our disclosure in ITEM 16G of Form 20-F.
● Quorum requirement for shareholder meetings: As permitted under the Companies Law, pursuant to our articles, the quorum required for an
ordinary meeting of shareholders consists of at least two shareholders present in person, by proxy or by other voting instrument, who hold at
least 25% of the voting power of our shares (and in an adjourned meeting, with some exceptions, two shareholders, regardless of the voting
power associated with their shares), instead of 33 1/3% of the issued share capital required under the NASDAQ Listing Rules.
● Nomination of directors. With the exception of external directors and directors elected by our board of directors due to vacancy, our directors are
elected by an annual meeting of our shareholders to hold office until the next annual meeting following one year from his or her election. The
nominations for directors, which are presented to our shareholders by our board of directors, are generally made by the board of directors itself,
in accordance with the provisions of our articles of association and the Israeli Companies Law. Nominations need not be made by a nominating
committee of our board of directors consisting solely of independent directors or otherwise, as required under the NASDAQ Listing Rules.
● Majority of independent directors. Under the Companies Law, we are only required to appoint at least two external directors, within the meaning
of the Companies Law, to our board of directors. Currently, four of our directors (of which two are external directors, within the meaning of the
Companies Law) qualify as independent directors under the rules of the U.S. federal securities laws and the NASDAQ Listing Rules.
ITEM 16H. Mine Safety Disclosure.
Not applicable.
110
Table of Contents
ITEM 17.
Financial Statements.
Not applicable.
ITEM 18.
Financial Statements.
See pages F-2 through F-45 appended hereto.
ITEM 19.
Exhibits.
Please see the exhibit index incorporated herein by reference.
PART III
111
Table of Contents
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
SIGNATURES
KORNIT DIGITAL LTD.
/s/ Guy Avidan
By:
Name: Guy Avidan
Title: Chief Financial Officer
Date: March 20, 2018
112
Table of Contents
Exhibit No. Description
ANNUAL REPORT ON FORM 20-F
INDEX OF EXHIBITS
1.1
2.1
4.1
4.2
4.4
4.5
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
8.1
12.1
Amended and Restated Articles of Association of Kornit Digital Ltd.(1)
Specimen ordinary share certificate of Kornit Digital Ltd.(2)
Amended and Restated Investors’ Rights Agreement, dated March 18, 2015, by and among Kornit Digital Ltd. and certain of the Registrant’s
shareholders(1)
Form of Indemnification Agreement(2)
2004 Share Option Plan(3)
2012 Share Incentive Plan(3)
2015 Incentive Compensation Plan(1)
Kornit Digital Ltd.’s Compensation Policy(4)
English Summary of the Office and Parking Space Lease Agreement dated as of December 17, 2007, by and between the Registrant and
Industrial Building Corporation Ltd. as amended by Addendum, dated 2007, Addendum to Lease Agreement, dated 2007, Addendum to
Lease Agreement, dated March 8, 2012, Addendum to Lease Agreement, dated 2012, Addendum to Lease Agreement, dated December 19,
2012, Addendum to Lease Agreement, dated May 20, 2013, Addendum to Lease Agreement, dated January 12, 2014, Addendum to Lease
Agreement, dated January 12, 2014, Addendum to Lease Agreement, dated December 27, 2015 and Addendum to Lease Agreement, dated
December 28, 2015, Addendum to the Lease Agreement dated October 17, 2017 and the Addendum dated February 21, 2018
English Summary of the Lease Agreement, dated March 25, 2010, by and between the Registrant and Benvenisti Engineering Ltd. as
amended by Addendum to Lease Agreement, dated November 21, 2011, and Addendum to Lease Agreement, dated September 16, 2014,
Addendum to the Lease Agreement dated March 3, 2015 and an Addendum to the Lease Agreement dated August 31, 2017
OEM Supply Agreement, dated December 3, 2015, among the Registrant and FujiFilm Dimatix, Inc. †(5)
Sales Representative Agreement, dated April 1, 2014, between the Registrant and Hirsch International Corporation †(3)
Manufacturing Services Agreement, dated May 2015, by and between the Registrant and Flextronics (Israel) Ltd. †(6)
English Translation of Hebrew Original of Agreement, dated December 22, 2016 between the Registrant and B.G. (Israel) Technologies Ltd.
†(7)
Master Purchase Agreement, dated January 10, 2017, between the Registrant and Amazon Corporate LLC†(8)
Transaction Agreement, dated January 10, 2017, between the Registrant and Amazon.com, Inc. (9)
Warrant to Purchase Ordinary Shares, dated January 10, 2017, issued to Amazon.com NV Investment Holdings LLC(10)
Lease, dated December 2017, between Kornit Digital North America, Inc. and Bonanno Real Estate Group I, L.P.
List of subsidiaries of the Registrant
Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to §302 of the
Sarbanes-Oxley Act of 2002
12.2
Certificate of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to §302 of the
Sarbanes-Oxley Act of 2002
13.1
Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-
Oxley Act of 2002, furnished herewith
15.1
Consent of Kost Forer Gabbay & Kasierer, a member firm of Ernst & Young Global, an independent registered public accounting firm.
(1) Previously filed with the SEC on March 18, 2015 as exhibit to the Registrant’s registration statement on Form F-1 (SEC File No. 333-202291) and
incorporated by reference herein.
113
Table of Contents
(2) Previously filed with the SEC on March 10, 2015 as an exhibit to the Registrant’s registration statement on Form F-1 (SEC File No. 333-202291) and
incorporated by reference herein.
(3) Previously filed with the SEC on February 25, 2015 as an exhibit to the Registrant’s registration statement on Form F-1 (SEC File No. 333-202291) and
incorporated by reference herein.
(4) Previously filed with the SEC on August 10, 2015 as Annex A to Exhibit 99.1 to the Registrant’s report of foreign private issuer on Form 6-K and
incorporated by reference herein.
(5) Previously filed with the SEC on April 14, 2016 as Exhibit 4.9 to Amendment No. 1 to the Registrant’s Annual Report on Form 20-F and incorporated by
reference herein.
(6) Previously filed with the SEC on March 30, 2017 as Exhibit 4.11 to the Registrant’s Annual Report on Form 20-F and incorporated by reference herein.
(7) Previously filed with the SEC on March 30, 2017 as Exhibit 4.12 to the Registrant’s Annual Report on Form 20-F and incorporated by reference herein.
(8) Previously filed with the SEC on March 30, 2017 as Exhibit 4.13 to the Registrant’s Annual Report on Form 20-F and incorporated by reference herein.
(9) Previously filed with the SEC on March 30, 2017 as Exhibit 4.14 to the Registrant’s Annual Report on Form 20-F and incorporated by reference herein.
(10) Previously filed with the SEC on March 30, 2017 as Exhibit 4.15 to the Registrant’s Annual Report on Form 20-F and incorporated by reference herein.
†
Portions of this agreement were omitted and a complete copy of this agreement has been provided separately to the Securities and Exchange Commission
pursuant to the company’s application requesting confidential treatment under Rule 406 under the Securities Act of 1933 as amended or Rule 24b-2 under
the Securities Exchange Act of 1934, as amended, as applicable.
114
Table of Contents
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2017
U.S. DOLLARS IN THOUSANDS
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
- - - - - - - - - - - - -
F-1
Page
F-2
F-3 – F-4
F-5
F-6
F-7
F-8 – F-9
F-10 – F-45
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
KORNIT DIGITAL LTD.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kornit Digital Ltd. and subsidiaries (the Company) as of December 31, 2016 and
2017, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2016 and 2017, and the results
of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting
principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company’s auditor since 2012.
Tel-Aviv, Israel
March 20, 2018
F-2
Table of Contents
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Short-term bank deposits
Marketable securities
Trade receivables, net
Inventories
Other accounts receivable and prepaid expenses
Total current assets
LONG-TERM ASSETS:
Marketable securities
Deposits and prepaid expenses
Severance pay fund
Deferred tax asset
Property and equipment, net
Intangible assets, net
Goodwill
Total long-term assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
F-3
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
December 31,
2016
2017
$
22,789 $
-
16,500
31,638
24,122
3,735
18,629
4,500
5,537
23,245
34,855
2,661
98,784
89,427
21,724
607
768
439
9,247
3,385
5,092
68,835
627
523
564
11,230
2,076
5,092
41,262
88,947
$
140,046 $
178,374
Table of Contents
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands, except share and per share data
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade payables
Employees and payroll accruals
Deferred revenues and advances from customers
Other payables and accrued expenses
Total current liabilities
LONG TERM LIABILITIES:
Accrued severance pay
Payment obligation related to acquisition
Other long-term liabilities
Total long-term liabilities
SHAREHOLDERS’ EQUITY:
Ordinary shares of NIS 0.01 par value –
Authorized: 200,000,000 shares at December 31, 2016 and 2017, respectively; Issued and Outstanding: 30,989,873
shares and 34,124,223 shares at December 31, 2016 and 2017, respectively
Additional paid in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of the consolidated financial statements.
F-4
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
December 31,
2016
2017
$
16,433 $
5,918
1,679
6,103
12,439
6,338
1,697
5,046
30,133
25,520
1,269
1,070
386
2,725
1,232
334
589
2,155
78
94,966
(82)
12,226
86
140,170
301
10,142
107,188
150,699
$
140,046 $
178,374
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands, except per share data
Revenues
Products
Services
Total revenues
Cost of revenues
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Restructuring
Total operating expenses
Operating income (loss)
Finance income (expenses), net
Income (loss) before taxes on income
Taxes on income
Net income (loss)
Basic net earnings (loss) per share
Diluted net earnings (loss) per share
The accompanying notes are an integral part of the consolidated financial statements.
F-5
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2016
2017
2015
$
79,751 $
6,654
86,405
100,818 $
7,876
108,694
101,953
12,135
114,088
35,632
10,188
45,820
46,483
12,801
59,284
46,480
13,497
59,977
40,585
49,410
54,111
11,950
13,367
9,500
-
17,383
18,338
12,259
-
20,834
21,279
13,578
503
34,817
47,980
56,194
5,768
1,430
(2,083)
(334)
46
452
5,434
709
1,476
648
(1,631)
384
4,725 $
828 $
(2,015)
0.19 $
0.03 $
0.18 $
0.03 $
(0.06)
(0.06)
$
$
$
Table of Contents
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
U.S. dollars in thousands
Net income (loss)
Other comprehensive income (loss):
Change in unrealized gains(losses) on marketable securities:
Unrealized gains (losses) arising during the period
Gains reclassified into net income (loss)
Net change
Change in unrealized gains (losses) on cash flow hedges:
Unrealized gains arising during the period
Gains reclassified into net income (loss)
Net change
Foreign currency translation adjustment
Total other comprehensive income (loss)
Comprehensive income (loss)
The accompanying notes are an integral part of the consolidated financial statements
F-6
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2016
2015
2017
$
4,725 $
828 $
(2,015)
(227)
-
(227)
5
(33)
(28)
118
133
(6)
127
97
(66)
31
43
(137)
201
104
(34)
70
436
(394)
42
271
383
$
4,588 $
1,029 $
(1,632)
Table of Contents
STATEMENTS OF SHAREHOLDERS’ EQUITY
U.S. dollars in thousands, except share data
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Preferred A-1 shares
Ordinary shares
Number of
shares
Number of
shares
outstanding Amount
outstanding Amount
Additional
paid in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
Shareholders’
equity
Balance at December 31,
2014
1,927,140
32 8,973,224
22
12,770
(146)
6,673
19,351
(1,927,140)
(32) 12,628,741
32
-
-
-
-
Conversion of preferred
shares
Issuance of ordinary shares
in initial public offering,
net of issuance expenses in
an amount of $2,415
Exercise of options
Share-based compensation
Other comprehensive loss
Net income
Balance at December 31,
2015
Exercise of options
Share-based compensation
Tax benefit related to
exercise of stock options
Warrants to customers, net
of issuance expenses in the
amount of $157
Other comprehensive
income
Net income
Balance at December 31,
2016
Issuance of ordinary shares
in a secondary offering, net
of issuance costs in an
amount of $981
Exercise of options
Share-based compensation
Cumulative effect of a
change in accounting
principle related to stock-
based compensation
Warrants to customers
Other comprehensive
income
Net loss
Balance at December 31,
2017
-
-
-
-
-
-
-
-
-
-
-
-
- 8,165,000
528,984
-
-
-
-
-
-
-
21
1
-
-
-
73,498
420
2,383
-
-
-
-
-
(137)
-
-
-
-
4,725
73,519
421
2,383
(137)
4,725
- 30,295,949
76
89,071
(283)
11,398
100,262
-
-
-
-
-
-
693,924
-
-
-
-
-
2
-
-
-
-
-
958
2,993
71
-
-
-
-
-
-
960
2,993
71
1,873
-
-
1,873
-
-
201
-
-
828
201
828
- $
- 30,989,873 $
78 $
94,966 $
(82) $
12,226 $
107,188
-
-
-
-
-
-
-
- $
- 2,300,000
834,350
-
-
-
6
2
-
35,071
2,758
4,411
-
-
-
-
-
-
-
-
-
-
-
-
69
2,895
-
-
-
-
-
-
-
(69)
-
383
-
-
(2,015)
-
2,895
383
(2,015)
-
-
-
35,077
2,760
4,411
- 34,124,223 $
86 $
140,170 $
301 $
10,142 $
150,699
The accompanying notes are an integral part of the consolidated financial statements.
F-7
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
Warrants to customers
Share based compensation
Tax benefit related to exercise of stock options
Amortization of premium on marketable securities
Realized gain on sale of marketable securities
Decrease (increase) in trade receivables
Decrease (increase) in other receivables and prepaid expenses
Increase in inventory
Increase in deferred taxes, net
Increase in other long-term assets
Increase (decrease) in trade payables
Increase in employees and payroll accruals
Increase (decrease) in deferred revenues and advances from customers
Increase (decrease) in other payables and accrued expenses
Increase (decrease) in accrued severance pay, net
Increase in other long-term liabilities
Loss from sale of property and Equipment
Foreign currency translation gain (loss) on intercompany balances with foreign subsidiaries
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
2015
December 31,
2016
2017
$
4,725 $
828 $
(2,015)
1,782
-
2,383
-
(113)
-
(13,117)
(1,648)
(4,610)
(57)
(68)
7,036
1,435
(820)
223
(2)
-
51
590
2,964
2,030
2,993
(71)
454
(6)
(9,257)
(411)
(6,061)
(181)
(217)
2,819
1,550
675
1,879
180
386
9
393
4,814
2,895
4,411
-
546
(34)
9,081
1,100
(10,629)
(125)
(10)
(3,635)
360
(31)
(461)
208
203
228
(916)
Net cash provided by (used in) operating activities
(2,210)
956
5,990
Cash flows from investing activities:
Purchase of property and equipment
Proceeds from sale of property and equipment
Cash paid in connection with acquisition
Proceeds from (investment in) bank deposits, net
Proceeds from sale marketable securities
Proceeds from maturity of marketable securities
Purchase of marketable securities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from public offering, net of issuance costs
Exercise of employee stock options
Payment of issuance cost related to warrants
Tax benefit related to exercise of stock options
Payment of contingent consideration
Net cash provided by financing activities
(1,861)
8
(1,000)
(22,000)
-
1,500
(35,518)
(5,462)
-
(9,206)
22,000
2,086
4,500
(11,455)
(5,660)
6
-
(4,500)
39,353
7,240
(83,183)
(58,871)
2,463
(46,744)
74,180
421
-
-
-
-
958
(90)
71
-
35,077
2,760
-
-
(1,400)
74,601
939
36,437
Foreign currency translation adjustments on cash and cash equivalents
(49)
(33)
157
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
13,520
4,993
4,358
18,464
(4,317)
22,789
Cash and cash equivalents at the end of the period
$
18,464 $
22,789 $
18,629
The accompanying notes are an integral part of the consolidated financial statements.
F-8
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes
Non-cash investing and financing activities:
Property and equipment acquired by credit
Inventory transferred to be used as property and equipment
Property and equipment transferred to be used as inventory
Issuance expenses on credit
The accompanying notes are an integral part of the consolidated financial statements.
F-9
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2016
2015
2017
$
1,368 $
593 $
853
$
$
$
$
422 $
808 $
692 $
106 $
1,090 $
- $
- $
362 $
427
397
-
-
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
a.
b.
c.
d.
e.
Kornit Digital Ltd. (the “Company”) was incorporated in 2002 under the laws of the State of Israel. The Company and its subsidiaries
develop, design and market digital printing solutions for the global printed textile industry. The Company’s and its subsidiaries’
solutions are based on their proprietary digital textile printing systems, ink and other consumables, associated software and value-added
services.
The Company established wholly-owned subsidiaries in Israel, the United States, Germany, Hong Kong and the United Kingdom. The
Company’s subsidiaries are engaged primarily in sales, and marketing, except for the Israeli subsidiary which is engaged primarily in
research and development and manufacturing.
On January 31, 2017 the Company closed a follow on and secondary offering where by 8,625,000 ordinary shares were sold in the
transaction to the public. The aggregate net proceeds received by the Company from the offering were $35.077, net of underwriting
discounts, commissions and offering expenses. Refer to note 10.
On May 15, 2017, the Company made an additional underwritten secondary offering of 4,250,000 ordinary shares by the Company’s
major shareholder. The Company did not receive any of the proceeds from the sale of these ordinary shares.
The Company depends on five major suppliers to supply certain components for the production of its products. If one of these suppliers
fails to deliver or delays the delivery of the necessary components, the Company will be required to seek alternative sources of supply.
A change in these suppliers could result in manufacturing delays, which could cause a possible loss of sales and, consequently, could
adversely affect the Company’s results of operations and financial position.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States
(“U.S. GAAP”).
a.
Use of estimates:
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates,
judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. The
Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available
at the time they are made. Actual results could differ from those estimates.
F-10
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
On an ongoing basis, the Company’s management evaluates estimates, including those related to intangible assets and goodwill, tax
assets and liabilities, fair values of stock-based awards, inventory write-offs, warranty provision, allowance for bad debt and provision
for rebates and returns. Such estimates are based on historical experience and on various other assumptions that are believed to be
reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
b.
Financial statements in United States dollars:
A majority of the revenues of the Company and its subsidiaries are denominated in U.S. dollars (“dollar” or “dollars”). The dollar is the
primary currency of the economic environment in which the Company and its subsidiaries, other than the Company’s German
subsidiary, operate. Thus, the functional and reporting currency of the Company and its subsidiaries, other than the Company’s German
subsidiary, is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are re-measured into U.S. dollars
in accordance with Accounting Standards Codification (“ASC”) No. 830 “Foreign Currency Matters”. Changes in currency exchange
rates between the Company’s functional currency and the currency in which a transaction is denominated are included in the Company’s
results of operations as finance income (expenses), net in the period in which the currency exchange rates change.
For the Company’s subsidiary in Germany whose functional currency is the Euro all amounts on the balance sheets have been translated
into the dollar using the exchange rates in effect on the relevant balance sheet dates. All amounts in the statements of income have been
translated into the dollar using the exchange rate on the respective dates on which those elements are recognized. The resulting
translation adjustments are reported as a component of accumulated other comprehensive income in shareholders’ equity.
c.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions
including profits from intercompany have been eliminated upon consolidation.
d.
Cash equivalents:
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or
less, at acquisition.
e.
Short-term bank deposits:
Short-term bank deposits are deposits with an original maturity of more than three months but less than one year from the date of
acquisition.
F-11
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
f.
Marketable securities:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The Company accounts for investments in marketable securities in accordance with ASC 320, “Investments - Debt and Equity
Securities”. Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-
evaluates such determinations at each balance sheet date.
The Company classifies marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses reported in “accumulated other comprehensive income” in shareholders’ equity. Realized gains and losses on
sales of marketable securities are included in finance expenses, net and are derived using the specific identification method for
determining the cost of securities.
The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of
which, together with interest, are included in finance expenses, net.
The Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities below the cost basis
of such securities is judged to be other-than-temporary. Factors considered in making such a determination include the duration and
severity of the impairment, the reason for the decline in value, the potential recovery period and the Company’s intent to sell, including
whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities
that are deemed other-than-temporarily impaired (“OTTI”), the amount of impairment is recognized in the statement of operations and is
limited to the amount related to credit losses, while impairment related to other factors is recognized in accumulated other
comprehensive income (loss). The Company did not recognize any impairment with respect to OTTI on its marketable securities in
2015, 2016 and 2017.
g.
Inventories:
Inventories are measured at the lower of cost or net realizable value. The cost of inventories comprises costs of purchase and costs
incurred in bringing the inventories to their present location and condition. Inventory write-down is measured as the difference between
the cost of the inventory and net realizable value upon assumptions about future demand, and is charged to the cost of sales.
Cost of inventories is determined as follows:
Raw and packing materials - on the basis of weighted average cost.
Finished goods - on the basis of average costs of materials, and other direct manufacturing cost.
F-12
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Inventory write offs have been provided to cover risks arising from dead and slow-moving items, technological obsolescence and excess
inventories according to revenue forecasts.
During the years ended December 31, 2015, 2016 and 2017, the Company recorded inventory write offs in a total amount of $824,
$2,211 and $2,988, respectively.
h.
Property and equipment:
Property and equipment are measured at cost, including directly attributable costs, less accumulated depreciation and accumulated
impairment losses. Depreciation is calculated on a straight-line basis over the useful life of the assets at annual rates as follows:
Office furniture and equipment
Computer and peripheral equipment
Machinery and equipment
Leasehold improvements
%
7 - 20
33
15
*)
*)
Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term (including the extension
option held by the Company and intended to be exercised) and the expected life of the improvement.
i.
Goodwill and other intangible assets:
Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Under ASC No. 350,
“Intangibles – Goodwill and other” (“ASC No. 350”), goodwill is not amortized but rather is tested for impairment at least annually or
more frequently if events or changes in circumstances indicate that the carrying value may be impaired. In accordance with ASC No.
350, the Company performs an annual impairment test on December 31 of each year.
The Company operates in one operating segment and this segment comprises the only reporting unit. The Company tests goodwill using
the two-step process in accordance with ASC No. 350. The first step, identifying a potential impairment, compares the fair value of the
reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step would need to be performed;
otherwise, no further step is required. The second step, measuring the impairment loss, compares the implied fair value of the goodwill
with the carrying amount of the goodwill. Any excess of the goodwill carrying amount over the applied fair value is recognized as an
impairment loss, and the carrying value of goodwill is written down to fair value. During the years ended December 31, 2015, 2016 and
2017, no impairment of goodwill has been identified.
The intangible assets of the Company are not considered to have an indefinite useful life and are amortized over their useful lives.
Customer relationships are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting
policy results in accelerated amortization of such assets as compared to the straight-line method. Acquired technology and non-
competition agreements are amortized on a straight-line basis.
F-13
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j.
Impairment of long lived assets and intangible assets subject to amortization:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair
value of the assets.
During the years ended December 31, 2015, 2016 and 2017, no impairment losses were recorded.
k.
Business combinations:
The Company accounts for business combinations in accordance with ASC No. 805, “Business Combinations” (“ASC No. 805”). ASC
No. 805 requires recognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at
their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in
estimated contingencies are to be recorded in consolidated statements of income. In addition, changes in valuation allowance related to
acquired deferred tax assets and in acquired income tax position are to be recognized in consolidated statements of income.
Acquisition related costs are expensed to the statements of income in the period incurred.
l.
Revenue recognition:
The Company generates revenues from the sale of systems, inks and consumable products and from services to its products. The
Company generates revenues from sale of its products directly to end-users and indirectly through independent distributors, all of whom
are considered end-users.
Revenues are recognized in accordance with “Revenue Recognition” (“ASC No. 605”), provided that the collection of the resulting
receivable is probable, there is persuasive evidence of an arrangement, no significant obligations remain and the price is fixed or
determinable.
Revenues from selling these products are recognized upon delivery, provided that all other revenue recognition criteria are met. In
respect of sale of systems with installation and training services, the Company considers these services to be not essential to the
functionality of the systems. Therefore, the Company recognizes the revenues of the systems upon their delivery in accordance with the
agreed-upon delivery terms once all other revenue recognition criteria have been met and the related services are recognized when
provided or completed.
F-14
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The Company considers all arrangements with payment terms extending beyond the standard payment terms not to be fixed or
determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer, provided that all
other revenue recognition criteria have been met.
Revenues from service are derived mainly from the sale of print heads, spear parts and sale of service contracts. The Company’s print
heads and spear parts revenues are recognized upon delivery, provided that all other revenue recognition criteria are met. The service
contracts are recognized ratably, on a straight-line basis, over the period of the service.
Revenues from ink and other consumable products when sold separately are generally recognized upon shipment assuming all other
revenue recognition criteria have been met.
Although, in general, the Company does not grant rights of return, there are certain instances where such rights are granted. The
Company maintains a provision for returns in accordance with ASC No 605, which is estimated, based primarily on historical
experience as well as management judgment, and is recorded as reduction of revenue. Such provision amounted to $346 and $580 as of
December 31, 2016 and 2017, respectively.
The Company periodically provides customer incentive programs including product discounts, volume-based rebates and warrants,
which are accounted for as reductions to revenue in the period in which the revenue is recognized. These reductions to revenue are made
based upon reasonable and reliable estimates that are determined by historical experience and the specific terms and conditions of the
incentive.
Deferred revenue includes amounts received from customers for which revenue has not yet been recognized.
In cases where the Company’s customers trade-in old systems as part of sales of new systems, the fair value of the old systems is
recorded as inventory, provided that such value can be determined.
m.
Shipping and Handling:
Shipping and handling fees charged to the Company’s customers are recognized as revenue in the period shipped and the related costs
for providing these services are recorded as a cost of revenues. Revenues from shipping in the years ended December 31, 2015, 2016
and 2017 were $719, $768 and $1,355, respectively.
n.
Cost of revenues:
Cost of revenues is comprised mainly of cost of systems and ink production, employees’ salaries and related costs, allocated overhead
expenses, import taxes and royalties and Shipping and handling fees.
F-15
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
o.
Warranty costs:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The Company typically provides a one-year warranty on the systems including parts and labor. A provision is recorded for estimated
warranty costs at the time revenues are recognized based on historical warranty costs and management’s estimates. Factors that affect
the Company’s warranty liability include the number of systems, historical rates of warranty claims and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts thereof as necessary.
The followings are the changes in the liability for product warranty from January 1, 2016 to December 31, 2017:
Balance at January 1, 2016
Provision for warranties issued during the year
Reduction for payments and costs to satisfy claims
Balance at December 31, 2016
Provision for warranties issued during the year
Reduction for payments and costs to satisfy claims
Balance at December 31, 2017
Research and development expenses:
Research and development expenses are charged to the statement of income, as incurred.
Restructuring:
p.
q.
$
940
2,984
(1,905)
2,019
2,807
(3,049)
$
1,777
Restructuring consists of costs primarily related to early retirement or retention agreements with the employees of our Wisconsin facility
in connection with the transition of our U.S headquarter to East Coast in the United States. Restructuring expenses in the year ended
December 31, 2017 in the amount of $503. Please refer to note 8.
r.
Accounting for share-based compensation:
The Company accounts for share based compensation in accordance with, “Compensation - Stock Compensation” (“ASC No. 718”) that
requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The
value of the award is recognized as an expense over the requisite service periods in the Company’s consolidated statement of income.
F-16
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The Company selected the binomial option pricing model as the most appropriate fair value method for its stock options awards with the
following assumptions for the years ended December 31, 2015, 2016 and 2017:
Year ended December 31,
2016
2017
2015
Suboptimal exercise multiple
Risk free interest rate
Volatility
Dividend yield
2.0-2.5
1.0-1.5
0.2%-2.2% 0.3%-2.2% 2.2%-2.3%
50%-55% 54%-56% 51%-53%
0%
1.0-1.5
0%
0%
The expected volatility is based on volatility of similar companies whose share prices are publicly available over an historical period
equivalent to the option’s expected term. The computation of the suboptimal exercise multiple based on empirical studies, the early
exercise factor of public companies is approximately 100% for employees and 150% for managers.
The interest rate for period within the contractual life of the award is based on the U.S. Treasury Bills yield curve in effect at the time of
grant. The Company currently has no plans to distribute dividends and intends to retain future earnings to finance the development of its
business.
The fair value of each restricted stock unit (“RSU”) is the market value as determined by the closing price of the common share prior to
the day of grant.
The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on service conditions,
using the straight-line method, over the requisite service period of each of the awards. The Company recognizes forfeitures of awards as
they occur.
On January 1, 2017, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)
No. 2016-09 (Topic 718) Compensation—Stock Compensation: Improvements to Employee Stock-Based Payment Accounting, which
simplifies several aspects of the accounting for stock-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities, forfeiture, statutory tax withholding requirements, and classification on the statement of cash
flows.
The impact of the adoption on the Company’s Consolidated Financial Statements was as follows:
1.
Forfeitures: The Company elected to account for forfeitures as they occur using a modified retrospective transition
method, rather than estimating forfeitures, resulting in a cumulative-effect of $69, which decreased the January 1, 2017 opening
retained earnings balance on the Consolidated Balance Sheets.
F-17
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
2.
3.
Historically, excess tax benefits or deficiencies from the Company’s equity awards were recorded as additional paid-in capital
in its consolidated balance sheets. As a result of adoption, starting January 1, 2017 the Company prospectively recorded any
excess tax benefits or deficiencies from its equity awards as part of its provision for income taxes in its consolidated statements
of operations in the reporting periods in which equity vesting occurs.
Cash flow presentation of excess tax benefits: The Company is required to classify excess tax benefits along with other income
tax cash flows as an operating activity either prospectively or retrospectively. The Company elected to apply the change in
presentation to the statements of cash flows prospectively from January 1, 2017. Prior periods have not been adjusted.
s.
Derivatives and hedging:
The Company accounts for derivatives and hedging based on ASC No. 815, “Derivatives and Hedging” (“ASC No. 815”). ASC No. 815
requires the Company to recognize all derivatives on the balance sheet at fair value. The accounting for changes in the fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and
further, on the type of hedging relationship.
According to ASC No. 815, for derivative instruments that are designated and qualify as hedging instruments, the Company must
designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net
investment in a foreign operation. If the derivatives meet the definition of a hedge and are so designated, depending on the nature of the
hedge, changes in the fair value of such derivatives will either be offset against the change in fair value of the hedged assets, liabilities,
or firm commitments through earnings, or recognized in accumulated other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative’s change in fair value is recognized in earnings.
Starting 2015, the Company entered into forward and option contracts to hedge against the risk of overall changes in future cash flow
from payments of payroll and related expenses denominated in New Israeli Shekels (“NIS”). As of December 31, 2016 and 2017, the
fair value of the Company’s outstanding forward and option contracts amounted to $3 and $45 which is included within other payables
and accrued expenses, respectively on the balance sheets.
The Company measured the fair value of these contracts in accordance with ASC No. 820, “Fair Value Measurements and Disclosures”
(“ASC No. 820”), and they were classified as level 2 of the fair value hierarchy.
As of December 31, 2016 and December 31, 2017, the Company had outstanding hedging contracts in the notional amount of $8,636
and $3,651, respectively.
F-18
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
t.
Advertising:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Advertising costs are charged to operations as incurred and were $283, $526 and $612 for the years ended December 31, 2015, 2016 and
2017, respectively.
u.
Income taxes:
The Company accounts for income taxes and uncertain tax positions in accordance with ASC No. 740, “Income Taxes” (“ASC No.
740”). ASC No. 740 prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined
based on temporary differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to amounts more likely than not to be realized. Deferred tax assets and liabilities are classified to
non-current assets and liabilities, respectively.
ASC No. 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to
evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it
is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of
any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. The Company accrues interest and penalties related to unrecognized tax benefits on its
taxes on income.
v.
Concentrations of credit risks:
Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash
and cash equivalents, bank deposits, marketable securities, foreign exchange contracts and trade receivables.
The majority of the Company’s and its subsidiaries’ cash and cash equivalents, bank deposits and marketable securities are invested in
major banks in Israel and the U.S. Generally, these cash equivalents may be redeemed upon demand and, therefore management
believes that it bears a lower risk.
The Company attempts to limit its exposure to interest rate risk by investing in securities with maturities of less than three years;
however, the Company may be unable to successfully limit its risk to interest rate fluctuations. At any time, a sharp rise in interest rates
could have a material adverse impact on the fair value of its investment portfolio. Conversely, declines in interest rates could have a
material favorable impact on the fair value of its investment portfolio. Increases or decreases in interest rates could have a material
impact on interest earnings related to new investments during the period.
F-19
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The trade receivables of the Company and its subsidiaries are mainly derived from sales to customers located in the United States,
Europe, the Middle East, Africa and Asia Pacific. The Company performs ongoing credit evaluations of its customers. In certain
circumstances, the Company may require from its customers letters of credit, other collateral or additional guarantees. An allowance for
doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection.
Historically, the Company has not recorded allowance for doubtful accounts, however certain immaterial bad debt expenses amounted to
$21, $216 and $97 was recorded for the years ended December 31, 2015, 2016 and 2017 respectively.
w.
Severance pay:
The Company’s employees in Israel have subscribed to Section 14 of Israel’s Severance Pay Law, 5723-1963 (“Section 14”). Pursuant
to Section 14, the Company’s employees, covered by this section, are entitled only to monthly deposits, at a rate of 8.33% of their
monthly salary, made on their behalf by the Company. Payments in accordance with Section 14 release the Company from any future
the severance liabilities in respect of those employees. Neither severance pay liability nor severance pay fund under Section 14 for such
employees is recorded on the Company’s balance sheet.
With regards to employees in Israel that are not subject to Section 14, the Company’s liability for severance pay is calculated pursuant to
the Severance Pay Law, based on the most recent salary of the relevant employees multiplied by the number of years of employment as
of the balance sheet date. These employees are entitled to one-month salary for each year of employment or a portion thereof. The
Company’s liability for these employees is fully provided for via monthly deposits with severance pay funds, insurance policies and an
accrual. The value of these deposits is recorded as an asset with other assets on the Company’s balance sheet.
The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to the Severance Pay Law or labor agreements.
Severance pay expenses for the years ended December 31, 2015, 2016 and 2017 were $1,354, $1,590 and $2,088 respectively.
x.
Fair value of financial instruments:
The Company applies ASC No. 820 Under this standard, fair value is defined as the price that would be received to sell an asset or paid
to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
F-20
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
In determining fair value, the Company uses various valuation approaches. ASC No. 820 establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the
most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or
liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect
the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the
best information available in the circumstances.
The hierarchy is broken down into three levels based on the inputs as follows:
Level 1 -
Level 2 -
Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company
can access at the measurement date.
Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are
observable, either directly or indirectly.
Level 3 -
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value.
The carrying amount of cash, cash equivalents, short term bank deposits, trade receivables, other accounts receivable, trade payables and
other accounts payable and accrued expenses approximates their fair value due to the short-term maturities of such instruments.
The Company measures its marketable securities and foreign currency derivative instruments at fair value. Marketable securities and
foreign currency derivative instruments are classified within Level 2 as the valuation inputs are based on quoted prices and market
observable data of similar instruments.
The contingent payment related to the SPSI acquisition is classified within Level 3 as it is based on significant inputs not observable in
the market.
y.
Comprehensive income:
The Company accounts for comprehensive income in accordance with FASB ASC No. 220, “Comprehensive Income.” Comprehensive
income generally represents all changes in shareholders’ equity during the period except those resulting from investments by, or
distributions to, shareholders. The Company determined that its items of other comprehensive income relate to gains and losses on
hedging derivative instruments, unrealized gains and losses on available-for-sale securities and unrealized gain and losses from foreign
currency translation adjustments.
F-21
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
z.
Basic and diluted net income per share:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Basic net income per share is computed based on the weighted average number of ordinary shares outstanding during each period.
Diluted net income per share is computed based on the weighted average number of ordinary shares outstanding during each period,
plus dilutive potential ordinary shares considered outstanding during the period, in accordance with ASC No. 260, “Earnings Per
Share”.
For the year ended December 31, 2017, all outstanding options and RSU’s have been excluded from the calculation of the diluted
earnings per share since their effect was anti-dilutive. The total number of shares related to the outstanding options and RSU’s excluded
from the calculation of diluted net earnings per share due to their anti-dilutive effect was 762,152 and 1,498,503 for the years ended
December 31, 2015 and 2016, respectively.
aa.
Impact of recently issued accounting standard:
1.
2.
In May 2014, and in following related amendments, the FASB issued a new comprehensive revenue recognition guidance on
revenue from contracts with customers (hereinafter “the Standard”) that will supersede the current revenue recognition
guidance. The Standard provides a unified model (five-step analysis of transactions) to determine when and how revenue is
recognized. The core principle of the Standard is that an entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. Under the new standard, a good or service is transferred to the customer when (or as) the
customer obtains control of the good or service, which differs from the risk and rewards approach under current guidance.
Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the
transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain
circumstances. The Standard is effective for annual reporting periods beginning after December 15, 2017, including interim
periods within that reporting period. This Standard may be applied retrospectively to each prior period presented or
retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption.
The Company will adopt the Standard using the modified retrospective approach in the first quarter of fiscal 2018. The
Company has completed its evaluation of the Standard and does not expect a material change in its pattern of revenue
recognition.
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), whereby, lessees will be required to recognize for all
leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease,
measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the
use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified
retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements must be applied. The modified retrospective approach would not require any transition
accounting for leases that expired before the earliest comparative period presented. Companies may not apply a full
retrospective transition approach. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018.
Early application is permitted. The Company is evaluating the potential impact of this pronouncement.
F-22
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
3.
4.
5.
6.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which requires the measurement and recognition
of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss
impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-
13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The
Company is evaluating the potential impact of this pronouncement.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity
Transfers Other than Inventory (ASU 2016-16), which requires the recognition of the income tax consequences of an intra-
entity transfer of an asset, other than inventory, when the transfer occurs. This ASU will be effective for annual and interim
reporting periods beginning after December 15, 2017 and is to be applied on a modified retrospective basis. The adoption of
this standard will not have a material impact on the Consolidated Financial Statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (ASU 2017-04) “Intangibles-Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates step two of the goodwill impairment test
and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying
amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net
assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years
beginning after December 15, 2019; early adoption is permitted. The Company does not expect that this new guidance will
have a material impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01 (ASU 2017-01) “Business Combinations (Topic
805): Clarifying the Definition of a Business.” ASU 2017-01 provides guidance to evaluate whether transactions should be
accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets
acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are
not considered a business. The guidance is effective for public companies for fiscal years beginning after December 15, 2017,
including interim periods within those periods. The Company expects no material impact on its consolidated financial
statements.
F-23
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
7.
In August 2017, the FASB issued ASU No. 2017-12 (Topic 815) Derivatives and Hedging — Targeted Improvements to
Accounting for Hedging Activities, which expands an entity’s ability to hedge financial and nonfinancial risk components and
amends how companies assess effectiveness as well as changes the presentation and disclosure requirements. The new standard
is to be applied on a modified retrospective basis and is effective for interim and annual periods beginning after December 15,
2018, with early adoption permitted. The Company is currently evaluating the impact of adoption on the Consolidated
Financial Statements.
NOTE 3:- ACQUISITION
On July 1, 2016 (the “Closing Date”), the Company, through its wholly owned subsidiary Kornit Digital North America Inc., acquired the digital
direct to garment printing assets of SPSI Inc., a North American distributor and service provider for graphic arts, printing and garment decoration
solutions. Under the related acquisition agreement, the total consideration of $11,443 is composed as follows:
$9,206 in cash paid on the Closing Date, of which $741 was held in escrow for twelve to eighteen months following the Closing Date.
Milestone-based contingent payments in a total of up to $2,700 payable in 2016, 2017 and 2018. The milestone-based contingent payments are
subject to the acquired business territory meeting revenues targets in 2016, 2017 and 2018 as described at the asset purchase agreement. These
milestone-based contingent payments were measured at fair value at the Closing Date and recorded as a liability on the balance sheet in the
amount of $2,237 ($2,470 and $1,234 as of December 31, 2016 and 2017, respectively).
In addition, the Company incurred acquisition-related costs in a total amount of $493, which are included in general and administrative expenses.
Acquisition-related costs include legal, accounting, consulting fees and other external costs directly related to the acquisition.
F-24
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:- FAIR VALUE MEASUREMENTS
The following is a summary of marketable securities:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
December 31, 2017
Gross
unrealized
gain
Gross
unrealized
loss
Amortized
cost
Matures within one year:
Corporate debentures
Government debentures
Matures after one year through three years:
Corporate debentures
Government debentures
$
5,190 $
295
5,485
56,514
12,403
68,917
41 $
11
52
-
-
-
Fair value
- $
-
-
5,231
306
5,537
(65)
(17)
(82)
56,449
12,386
68,835
Total
$
74,402 $
52 $
(82) $
74,372
Matures within one year:
Corporate debentures
Matures after one year through three years:
Corporate debentures
Total
December 31, 2016
Gross
unrealized
gain
Gross
unrealized
loss
Amortized
cost
Fair value
$
16,526 $
2 $
(28) $
16,500
21,798
$
38,324 $
5
7 $
(79)
21,724
(107) $
38,224
All investments with an unrealized loss as of December 31, 2017 are with continuous unrealized losses for less than 12 months.
The below table sets forth the Company’s assets and liabilities that were measured at fair value as of December 31, 2017 and December 31, 2016
by level within the fair value hierarchy.
F-25
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:- FAIR VALUE MEASUREMENTS (Cont.)
Assets:
Marketable securities
Foreign currency derivative contracts
Total financial assets
Liabilities:
Payment obligation related to acquisition
Total liabilities
Assets:
Marketable securities
Foreign currency derivative contracts
Total financial assets
Liabilities:
Payment obligation related to acquisition
Total liabilities
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
December 31, 2017
Level 1
Level 2
Level 3
Total
- $
-
74,372 $
45
- $
-
74,372
45
- $
74,417 $
- $
74,417
- $
- $
- $
- $
334 $
334 $
334
334
December 31, 2016
Level 1
Level 2
Level 3
Total
- $
-
38,224 $
3
- $
-
38,224
3
- $
38,227 $
- $
38,227
- $
- $
- $
1,070 $
1,070
- $
1,070 $
1,070
$
$
$
$
$
$
$
$
The following table set forth the change of fair value measurements that are categorized within Level 3:
Total fair value as of January 1, 2017
Settlement of payment obligation *)
Accretion of payment obligation
Total fair value as of December 31, 2017
$
$
1,070
(900)
164
334
*)
$900 is included within other payables and accrued expenses on the balance sheet as the set milestone was met as of December 31,
2017.
The fair value of the payment obligation related to acquisition was estimated based on several factors of which the most significant is the
Company’s revenue projections. The Company used a Monte Carlo Simulation of the triangular model with a discount rate of 15%. Payment
obligations related to acquisition are revalued to current fair value at each reporting date. Any change in the fair value as a result of time passage
is recognized in the financial expenses; any other changes in significant inputs such as the discount rate, the discount period or other factors used
in the calculation, is recognized in operating expenses in the consolidated results of operations in the period the estimated fair value changes.
Payment obligation related to acquisition will continue to be accounted for and measured at fair value until the contingencies are settled during
fiscal year 2018. Accretion of the payment obligation related to acquisition is included in financial expenses, net.
F-26
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:- INVENTORIES
Raw materials and components
Finished products (*)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
December 31,
2016
2017
$
12,322 $
11,800
15,756
19,099
$
24,122 $
34,855
(*)
Including amounts of $705 and $34 for the years ended December 31, 2016 and 2017, respectively, with respect to inventory delivered
to customers for which revenue was not yet recognized.
NOTE 6:- PROPERTY AND EQUIPMENT, NET
Cost:
Computer and peripheral equipment
Office furniture and equipment
Machinery and equipment
Leasehold improvements
Accumulated depreciation
Property and equipment, net
December 31,
2016
2017
$
1,935 $
1,332
8,962
4,978
2,616
1,497
11,098
7,022
17,207
22,233
(7,960)
(11,003)
$
9,247 $
11,230
Depreciation expenses for the years ended December 31, 2015, 2016 and 2017 were $1,560, $2,447 and $3,505 respectively.
During the years ended December 31, 2015, 2016 and 2017, the Company recorded a reduction of $166, $297 and $298, respectively to the cost
and accumulated depreciation of fully depreciated equipment no longer used.
F-27
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 7:- INTANGIBLE ASSETS, NET
a.
Intangible assets are comprised of the following:
Original amount:
Acquired technology
Customer relationships
Non-competition agreement
Accumulated amortization:
Acquired technology
Customer relationships
Non-competition agreement
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Weighted
average
amortization
period
Years
December 31,
2016
2017
$
8.14
5
4
1,566 $
2,614
265
1,566
2,614
265
$
4,445 $
4,445
766
261
33
866
1,404
99
1,060
2,369
Intangible assets, net
$
3,385 $
2,076
Amortization expenses for the years ended December 31, 2015, 2016 and 2017 were $222, $519 and $1,309, respectively.
b.
Future amortization expenses for the years ending:
December 31,
2018
2019
2020
2021
2022 and Thereafter
NOTE 8:- OTHER PAYABLES AND ACCRUED EXPENSES
Government authorities
Warranty provision short term
Professional services
Payment obligation related to acquisition
Restructuring
Accrued expenses
F-28
$
$
1,065
432
136
143
300
2,076
December 31,
2016
2017
$
993 $
1,741
693
1,400
-
1,276
867
1,680
470
900
503
626
$
6,103 $
5,046
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Lease commitments:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The Company leases facilities and vehicles under operating leases that expire on various dates through 2025. Aggregate minimum lease
and rental payments under non-cancelable operating leases as of December 31, 2017, are (in the aggregate) and for each succeeding
fiscal year below:
December 31,
2018
2019
2020
2021
2022 and thereafter
$
2,504
2,494
2,465
2,195
6,982
$
16,640
Total rent expenses for the years ended December 31, 2015, 2016 and 2017 were $1,443, $1,664 and $2,963, respectively.
b.
Charges:
As of December 31, 2017, the Company has two lines of credit with Israeli banks for total borrowings of up to $3 million, all of which
was undrawn as of December 31, 2017. These lines of credit are unsecured and available subject to the Company’s maintenance of a
30% ratio of total tangible shareholders’ equity to total tangible assets and that the total credit use will be less than 70% of the Company
and its subsidiaries’ receivables. Interest rates across these credit lines varied from 0.2% to 2.3% as of December 31, 2017.
As of December 31, 2017, The Company is in compliance with the financial covenants.
c.
Purchase commitments:
As of December 31, 2017, the Company has $16,475 of purchase commitments for goods and services from vendors.
d.
Litigation:
From time to time, the Company is party to various legal proceedings, claims and litigation that arise in the normal course of business. It
is the opinion of management that the ultimate outcome of these matters will not have a material adverse effect on the Company’s
financial position, results of operations or cash flows.
F-29
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
e.
Royalty Commitments:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Under the Company’s agreement for purchasing print heads and other products, which was amended and restated in 2016, the Company
is obligated to pay royalties at a rate set forth in the agreement up to an agreed maximum amount of $625 per year.
Royalties expenses for the years ended December 31, 2015, 2016 and 2017 were $625.
f.
Guarantees:
As of December 31, 2017, the Company provided two bank guarantees of $398 in the aggregate for its rented facilities.
NOTE 10:- SHAREHOLDERS’ EQUITY
a.
Company’s shares:
1.
Ordinary shares:
Any ordinary share confers equal rights to dividends and bonus shares, and to participate in the distribution of surplus assets
upon liquidation in proportion to the par value of each share regardless of any premium paid thereon, all subject to the
provisions of the Company’s articles of association. Each ordinary share confers its holder the right to participate in the general
meeting of the Company and one vote in the voting.
2.
Initial Public Offering:
On April 8, 2015, the Company closed its initial public offering (“IPO”) whereby 8,165,000 ordinary shares were sold by the
Company to the public (inclusive of 1,065,000 ordinary shares pursuant to the full exercise of an overallotment option granted
to the underwriters). The aggregate net proceeds received by the Company from the offering were $73,519, net of underwriting
discounts and commissions and offering expenses all of which have already been paid by the Company. Upon the closing of the
IPO, all of the Company’s outstanding preferred shares automatically converted into 12,628,741 ordinary shares.
3.
On January 31, 2017 the Company closed a follow on and secondary offering where by 8,625,000 ordinary shares were sold in
the transaction to the public of which 2,300,000 were issued by the Company and 6,325,000 were sold by the selling
shareholders (inclusive of 1,125,000 ordinary shares pursuant to the full exercise of an overallotment option granted to the
underwriters). The aggregate net proceeds received by the Company from the offering were $35,077, net of underwriting
discounts, commissions and offering expenses.
F-30
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- SHAREHOLDERS’ EQUITY (Cont.)
b.
Share option and RSU’s plans:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
A summary of the Company’s share option activity and related information is as follows:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
Number
of shares
upon
exercise
Weighted
average
exercise
price
Weighted-
average
remaining
contractual
term
(in years)
2,733,166 $
663,983
(834,350)
(202,152)
7.01 $
17.13
3.46
11.18
7.78 $
9.26
5.27
8.10
Aggregate
intrinsic
value
16,054
167
2,360,647 $
10.76 $
8.05 $
13,588
887,913 $
7.45 $
7.04 $
7,726
As of December 31, 2017, $11,177 in unrecognized compensation cost related to share options is expected to be recognized over a
weighted average vesting period of 3 years.
The weighted average fair value of options granted during the years ended December 31, 2015, 2016 and 2017 were $7.11, $5.64 and
$9.24 per share, respectively. The weighted average fair value of options vested during the year ended December 31, 2017 was $5.53.
The total intrinsic value of options exercised during the years ended December 31, 2015, 2016 and 2017 were $5,281, $7,822 and
$10,588, respectively.
c.
The options outstanding as of December 31, 2017, have been classified by exercise price, as follows:
Options outstanding
at December 31, 2017
Options exercisable
at December 31, 2017
Exercise
price
$
Number
outstanding
Weighted
average
exercise
price
$
Weighted
average
remaining
contractual
life
In years
Number
outstanding
Weighted
average
exercise
price
$
Weighted
average
remaining
contractual
life
In years
0.36-0.92
1.14-1.60
2.07-2.17
9.38-9.49
9.97-10.10
11.49-11.90
12.97-15.29
15.80-21.15
41,734
21,299
473,688
145,000
616,783
66,000
479,811
516,332
2,360,647
0.73
1.60
2.14
9.47
10.04
11.86
14.19
17.74
0.97
6.01
6.48
8.68
8.15
8.80
8.17
9.64
41,734
21,299
319,266
46,875
238,193
17,625
202,921
-
887,913
0.73
1.6
2.15
9.47
10.03
11.84
13.91
-
0.97
6.01
6.46
8.42
7.95
8.76
7.73
-
F-31
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- SHAREHOLDERS’ EQUITY (Cont.)
A summary of the Company’s RSUs activity is as follows:
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding as of December 31,
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Year ended
December 31,
2017
-
94,570
-
(5,811)
88,759
The weighted average fair values at grant date of RSUs granted for the year ended December 31, 2017 was $ 17.77.
d.
The Company’s Board of Directors approved Equity Incentive Plans pursuant to which the Company is authorized to issue to
employees, directors and officers of the Company and its subsidiaries (the “optionees”) options to purchase ordinary shares of NIS 0.01
par value each, at an exercise price equal to at least the fair market value of the ordinary shares at the date of grant. Under the plans,
options granted before 2014 generally vest in portions as follows: 50% of total options are exercisable two years after the date
determined for each optionee, a further 25% three years after the date determined for each optionee and a 25% four years after the date
determined for each optionee. Starting 2014, 25% of total options are exercisable one year after the date determined for each optionee
and a further 6.25% at the end of each subsequent three-month period for 3 years. Under the Equity Incentive Plans and starting 2017,
the Company grants Restricted Stock Units (“RSUs”). The RSU’s generally vest over a period of four years of employment. Options and
RSU that have vested are exercisable for up to 10 years from the grant date of the options or RSU to each employee. Options and RSUs
that are cancelled or forfeited before expiration become available for future grants.
During 2017, the Board of Directors approved an increase in the ordinary shares reserved for issuance to 4,324,412 ordinary shares. As
of December 31, 2017, an aggregate of 1,875,006 ordinary shares were available for future grants.
F-32
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- SHAREHOLDERS’ EQUITY (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
e.
The following table sets forth the total share based compensation expense included in the consolidated statements of operations for the
years ended December 31, 2015, 2016 and 2017:
Cost of products
Cost of services
Research and development
Sales and marketing
General and administrative
Year ended December 31,
2016
2015
2017
$
219 $
87
281
537
1,259
311 $
171
217
654
1,640
419
210
775
920
2,087
Total share-based compensation expense
$
2,383 $
2,993 $
4,411
f.
On January 10, 2017, the Company signed a master purchase agreement with Amazon Inc. under which 2,932,176 warrants to purchase
ordinary shares of the Company in exercise price of $13.03 were issued to Amazon as a customer incentive. The warrants are subject to
vesting as a function of payments for purchased products and services of up to $150 million over a five years period beginning on May
1, 2016, with the shares vesting incrementally each time Amazon makes a payment totaling $5 million to the Company.
The Company utilizes a Monte Carlo simulation approach to estimate the fair value of the warrants, which requires inputs such as
common ordinary share, the warrant strike price, estimated ordinary share price volatility and risk-free interest rate, among others. The
Company recognized a reduction to revenues of $2,030 and $2,895 during the years ended December 31, 2016 and 2017 respectively.
F-33
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- EARNINGS (LOSSES) PER SHARE
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The following table sets forth the computation of basic and diluted net earnings (losses) per share:
Year ended December 31,
2016
2015
2017
Numerator for basic and diluted net earnings (losses) per share:
Net income (loss)
$
4,725 $
828 $
(2,015)
Weighted average shares outstanding, net of treasury stock:
Denominator for basic net earnings (losses) per share
Effect of dilutive securities:
Employee share options
24,633,369 30,562,255 33,574,147
1,825,215
1,170,277
-
Denominator for diluted net earnings (losses) per share
26,458,584 31,732,532 33,574,147
Basic net earnings (losses) per share
Diluted net earnings (losses) per share
$
$
0.19 $
0.03 $
(0.06)
0.18 $
0.03 $
(0.06)
NOTE 12:- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated balances of other comprehensive income (loss):
Unrealized
Gains
(losses)
on
marketable
securities
Unrealized
Gains
(losses)
on
cash flow
hedges
Foreign
currency
translation
adjustment
Total
Year ended December 31, 2017:
Beginning balance
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
$
(100) $
104
(34)
3 $
436
(394)
15 $
271
-
Net current period other comprehensive income
70
42
271
Ending Balance
$
(30) $
45 $
286 $
(82)
811
(428)
383
301
F-34
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Unrealized
Gains
(losses)
on
marketable
securities
Unrealized
Gains
(losses)
on
cash flow
hedges
Foreign
currency
translation
adjustment
Total
Year ended December 31, 2016:
Beginning balance
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
$
Net current period other comprehensive income
(227) $
133
(6)
(28) $
97
(66)
127
31
Ending Balance
$
(100) $
3 $
(28) $
43
-
43
15 $
(283)
273
(72)
201
(82)
NOTE 13:- TAXES ON INCOME
a.
Tax rates:
Taxable income of the Israeli companies is subject to the Israeli corporate tax at the rate as follows: 2015: 26.5%, 2016: 25% and 2017:
24%
In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic
Policy for the 2017 and 2018 Budget Years), which reduces the corporate income tax rate to 24% (instead of 25%) effective from
January 1, 2017 and to 23% effective from January 1, 2018.
b.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Law”):
The Company’s production facilities in Israel have been granted “Beneficiary Enterprise” status under the Law. The Companies have
been granted the “Alternative Benefit Track” under which the main benefits are a tax exemption for undistributed income and a reduced
tax rate.
The duration of tax benefits is subject to a limitation of the earlier of 12 years from commencement of production, or 14 years from the
approval date. The Israeli Companies began to utilize such tax benefits in 2010.
F-35
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The entitlement to the above benefits is conditional upon the Company and its subsidiary fulfilling the conditions stipulated by the Law
and regulations published. In the event of failure to comply with these conditions, the benefits may be partially or fully canceled and the
Company or its subsidiary may be required to refund the amount of the benefits, in whole or in part, plus a consumer price index linkage
adjustment and including interest.
Income from sources other than the “Beneficiary Enterprise” are subject to the tax at the regular rate.
In the event of distribution of dividends from the above mentioned tax-exempt income, the amount distributed will be subject to the
same reduced corporate tax rate that would have been applied to the Beneficiary Enterprise’s income.
In addition, tax-exempt income attributed to the Beneficiary Enterprise will subject the Company to taxes upon distribution in any
manner including complete liquidation.
The Company does not intend to distribute any amounts of its undistributed tax-exempt income as dividend. The Company and its board
of directors intend to reinvest its tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income
taxes have been provided on income attributable to the Company’s Beneficiary Enterprise programs as the undistributed tax-exempt
income is essentially permanent by reinvestment.
As of December 31, 2017, tax-exempt income of $74,896 is attributable to the Company’s and its subsidiary’s various Beneficiary
Enterprise programs. If such tax-exempt income is distributed, it would be taxed at the reduced corporate tax rate applicable to such
income, and $18,724 would be incurred as of December 31, 2017.
A January 2011 amendment to the Law sets alternative benefit tracks to those previously in place, as follows: an investment grants track
designed for enterprises located in national development zone A and two new tax benefits tracks (“Preferred Enterprise” and “Special
Preferred Enterprise”), which provide for application of a unified tax rate to all preferred income of the company, as defined in the Law.
F-36
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Law prior to 2011 and,
instead, introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such term is
defined in the Law) effective as of January 1, 2011 and thereafter. A Preferred Company is defined as either (i) a company incorporated
in Israel and not fully owned by a governmental entity or (ii) a limited partnership that: (a) was registered under the Partnerships
Ordinance; (b) all of its limited partners are companies incorporated in Israel, but not all of them are governmental entities, which,
among other things, has Preferred Enterprise status and are controlled and managed from Israel. Pursuant to the 2011 Amendment, a
Preferred Company is entitled to a reduced corporate flat tax rate of 16% with respect to its preferred income, unless the Preferred
Enterprise is located in a certain development zone, in which case the rate will be 9%. Income derived by a Preferred Company from a
“Special Preferred Enterprise” (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to
further reduced tax rates of 8%, or to 5% if the Special Preferred Enterprise is located in a certain development zone.
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018
Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments (“the Amendment”) was
published. According to the Amendment, a preferred enterprise located in development area A will be subject to a tax rate of 7.5%
instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas
remains at 16%).
Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 20% or
such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax will be
withheld.
The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits. a Beneficiary
Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that
certain conditions are met, or file a request with the Israeli Tax Authority according to which its income derived as of January 1, 2011
will be subject to the provisions of the Law as amended in 2011. The Company has examined the possible effect, of these provisions of
the 2011 Amendment on its financial statements and has decided, not to opt to apply the new benefits under the 2011 Amendment for
the Israeli parent company and for its Israeli subsidiary it elected in 2013 to apply the benefit under the 2011 Amendment.
F-37
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Tax benefits under the Israeli Law for the Encouragement of Industry (Taxation), 1969:
The Israeli companies are an “Industrial Company” as defined by the Israeli Law for the Encouragement of Industry (Taxation), 1969,
and, as such, are entitled to certain tax benefits including accelerated depreciation, deduction of public offering expenses in three equal
annual installments and amortization of other intangible property rights for tax purposes.
c.
Income taxes of non-Israeli subsidiaries:
Non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of residence.
Taxes were not provided for undistributed earnings of the Company’s foreign subsidiaries. The Company’s board of directors has
determined that the Company does not currently intend to distribute any amounts of its undistributed earnings as dividend. The
Company intends to reinvest these earnings indefinitely in the foreign subsidiaries. Accordingly, no deferred income taxes have been
provided. If these earnings were distributed to Israel in the form of dividends or otherwise, the Company would be subject to additional
Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.
The amount of undistributed earnings of foreign subsidiaries that are considered to be reinvested as of December 31, 2017 was $4,900.
If these undistributed earnings are distributed, they would be taxed at the corporate tax rate applicable to such income, and $491 would
be incurred as of December 31, 2017.
d.
Tax Reform in the U.S:
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which among other provisions, reduced the U.S.
corporate tax rate from 35% to 21%, effective January 1, 2018.
At December 31, 2017, the Company has made reasonable estimates of the effects on the existing deferred tax balances for which
provisional amounts have been recorded. The Company re-measured certain of its U.S. deferred tax assets and liabilities, based on the
rates at which they are expected to reverse in the future. The estimated tax expense recorded related to the re-measurement of the
deferred tax balance was $355.
The aforesaid provisional amounts are based on the Company’s initial analysis of the Act as of December 31, 2017. Given the
significant complexity of the Act, anticipated guidance from the U.S. Treasury about implementing the Act, the potential for additional
guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to the Act, as well as
additional analysis and revisions to be conducted by the Company, these estimates may be adjusted during 2018.
e.
Final tax assessments:
The Company and its Israeli subsidiary received final tax assessments through 2012. The U.S subsidiary received final tax assessment
through 2011 and the German and the Hong Kong Subsidiaries have not received a final tax assessment since inception.
f.
Carryforward losses for tax purposes:
Carryforward operating tax losses of the Company and the Company’s Israeli subsidiary total approximately $50,763 as of December
31, 2017 and may be used indefinitely.
F-38
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
g.
Deferred income taxes:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s and its
subsidiaries’ deferred tax liabilities and assets are as follows:
Carryforward tax losses
Other temporary differences
Deferred tax assets
Deferred tax liability due to property and equipment
Valuation allowance
Deferred tax assets, net
December 31,
2016
2017
$
2,015 $
2,131
3,764
2,307
4,146
6,071
(102)
(4)
(3,605)
(5,503)
$
439 $
564
The net change in the valuation allowance primarily reflects an increase in deferred tax assets on net operating and other temporary
differences for which full valuation allowance is recorded.
h.
Income (loss) before income taxes is comprised as follows:
Domestic
Foreign
Income (loss) before income taxes
F-39
Year ended December 31,
2016
2015
2017
$
$
3,204 $
2,230
(507) $
1,983
(3,328)
1,697
5,434 $
1,476 $
(1,631)
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
i.
Taxes on income are comprised as follows:
Current taxes
Deferred taxes
Domestic
Foreign
Domestic taxes:
Current taxes
Foreign taxes:
Current taxes
Deferred taxes
Taxes on income
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2016
2015
2017
$
$
$
$
766 $
(57)
829 $
(181)
709 $
648 $
(113) $
822
(70) $
718
709 $
648 $
509
(125)
384
(594)
978
384
Year ended December 31,
2016
2015
2017
$
(113) $
(70) $
(594)
879
(57)
899
(181)
1,103
(125)
822
718
$
709 $
648 $
978
384
j.
Uncertain tax positions:
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
Beginning of year
Lapses of statutes of limitation
Cumulative translation adjustments and other
Balance at December 31
F-40
December 31,
2016
2017
$
1,074 $
(70)
-
1,004
(594)
206
$
1,004 $
616
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
As of December 31, 2017, the entire amount of the unrecognized tax benefits could affect the Company’s income tax provision and the
effective tax rate.
During the years ended December 31, 2015, 2016 and 2017, an amount of $26, $0 and $54, respectively, was added to the unrecognized
tax benefits derived from interest and exchange rate differences expenses related to prior years’ uncertain tax positions. As of December
31, 2016 and 2017, the Company had accrued interest related to uncertain tax positions in the amounts of $96 and $60, which is
included within income tax accrual on the balance sheets.
Exchange rate differences are recorded within financial income (expenses), net, while interest is recorded within income tax expense.
The Company believes that it has adequately provided for any reasonably foreseeable outcome related to tax audits and settlement. The
final tax outcome of its tax audits could be different from that which is reflected in the Company’s income tax provisions and accruals.
Such differences could have a material effect on the Company’s income tax provision and net income in the period in which such
determination is made.
F-41
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
k.
A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the
Company and the actual tax expense as reported in the statement of operations is as follows:
Year ended December 31,
2016
2015
2017
Income (loss) before taxes, as reported in the consolidated statements of income
$
5,434 $
1,476 $
(1,631)
Theoretical tax expense (benefit) at the Israeli statutory tax rate
Tax adjustment in respect of different tax rate of foreign subsidiaries
Non-deductible expenses and other permanent differences
Deferred taxes on losses and other temporary differences for which valuation
allowance was provided, net
Stock based compensation
Change in tax rate
Beneficiary enterprise benefits (*)
Foreign exchange differences (**)
Decrease in other uncertain tax positions
Other
1,440
101
184
546
606
-
(1,685)
(375)
(113)
5
369
114
140
318
716
240
(1,190)
-
(70)
11
(392)
111
143
1,899
996
(27)
(1,760)
-
(594)
8
Actual tax expense
$
709 $
648 $
384
(*) Basic earnings per share amounts of the benefit resulting from the “Beneficiary
Enterprise” status
0.19
0.04
(0.05)
Diluted earnings per share amounts of the benefit resulting from the “Beneficiary
Enterprise” status
0.17
0.04
(0.05)
(**) Until 2016 results for tax purposes were measured under, Measurement of results for tax purposes under the Income Tax
(Inflationary Adjustments) Law, 1985, in terms of earnings in NIS. As explained in Note 2b, the financial statements are
measured in U.S. dollars. The difference between the annual changes in the NIS/dollar exchange rate causes a difference between
taxable income and the income before taxes shown in the financial statements. In accordance with ASC 740-10-25-3(F), the
Company has not provided deferred income taxes in respect of the difference between the functional currency and the tax bases of
assets and liabilities. Starting 2016 the results of the Israeli companies for tax purposes are measured in U.S dollars.
F-42
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- GEOGRAPHIC INFORMATION
Summary information about geographic areas:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business). Operating segments are defined
as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the
chief executive officer, in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker
evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis.
The total revenues are attributed to geographic areas based on the location of the end-users.
The following table presents total revenues for the years ended December 31, 2015, 2016 and 2017 and long-lived assets as of December 31,
2016 and 2017:
Revenues from sales to customers located in:
U.S
EMEA
Asia Pacific
Other
Long-lived assets, by geographic region:
U.S
Israel
EMEA
Asia Pacific
F-43
Year ended December 31,
2016
2015
2017
$
45,528 $
21,600
16,042
3,235
63,656 $
24,720
11,963
8,355
60,541
32,015
16,092
5,440
$
86,405 $
108,694 $
114,088
December 31,
2016
2017
$
268 $
8,385
341
253
232
10,342
378
278
$
9,247 $
11,230
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- GEOGRAPHIC INFORMATION (Cont.)
Major customers’ data as a percentage of total revenues:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The following table sets forth the customers that represented 10% or more of the Company’s total revenues in each of the periods set forth below:
Customer A
Customer B
Customer C
*)
Less than 10%
NOTE 15:- SELECTED STATEMENTS OF INCOME DATA
Financial income (expenses), net:
Financial income:
Interest on bank deposits and other
Foreign currency translation differences
Interest on marketable securities
Financial expenses:
Bank charges
Foreign currency translation differences
Amortization of premium and accretion of discount on marketable securities
Year ended December 31,
2016
2015
2017
18%
15%
(*-
21%
(*-
16%
18%
(*-
13%
Year ended December 31,
2016
2015
2017
$
156 $
18
260
203 $
196
1,052
69
-
1,930
434
1,451
1,999
(160)
(495)
(113)
(277)
(674)
(454)
(244)
(757)
(546)
(768)
(1,405)
(1,547)
Total financial expense (income):
$
(334) $
46 $
452
F-44
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- BALANCES AND TRANSACTIONS WITH RELATED PARTIES
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The Company’s policy is to enter into transactions with related parties on terms that, on the whole, are no less favorable, than those available
from unaffiliated third parties. Based on the Company’s experience in the business sectors in which it operates and the terms of its transactions
with unaffiliated third parties, the Company believes that all of the transactions described below met this policy at the time they occurred.
1.
Fortissimo Capital Fund II (GP), L.P (“Fortissimo”)
Fortissimo is s major shareholder of the Company as of December 31, 2017. Pursuant to a management fee agreement between the
Company and Fortissimo, the Company was required to pay Fortissimo an annual fee of $120 plus an amount equal to 5% of the
Company’s net income, as defined in the management services agreement, up to a maximum of $250 per year. During the year ended
December 31, 2015 the Company recorded an expense of $30, in respect of payments to Fortissimo.
In March 2015, the Company and Fortissimo agreed to terminate the management service agreement upon the consummation of the
IPO. Under the agreement the Company agreed to pay Fortissimo a one-time payment of $750.
2.
Acord Insurance Agency Ltd. (“Acord”)
Acord is an insurance company which is owned, in part, by the Chairman of the Board. Starting December 1st, 2017, the Company
entered a one-year business and professional insurance contract with Acord. The total annual premium under the contract is $248.
During the year ended December 31, 2017 the Company recorded an expense of $21, in respect of payments to Acord.
3.
Priority Software Ltd. (“Priority”)
Priority is the Company’s ERP solution provider, which is owned by Fortissimo. In October 2017, the Company amended its contract
with Priority, increasing it from 55 general licenses to 250 named licenses including web. The total cost of the licenses was $58. In
addition, the Company will pay a yearly maintenance fees of $32. During the year ended December 31, 2017, the Company recorded an
expense of $15, in respect of payments to Priority.
- - - - - - - - - - - - - - - - - - - -
F-45
Exhibit 4.7
English Summary of the Office and Parking Space Lease Agreement dated as of December 17, 2007 by and between Industrial
Buildings Corporation Ltd. (the “Landlord”) and Kornit Digital Ltd. (the “Company”) (the “Original Lease Agreement”), as
amended by those certain (i) Addendum dated 2007 (the “First Parking Space Addendum”), (ii) Addendum to Lease Agreement
dated 2007 (the “Second Parking Space Addendum”), (iii) Addendum to Lease Agreement dated March 12, 2012 (the “First
Addendum”), (iv) Addendum to Lease Agreement dated 2012 (the “Third Parking Space Addendum”), (v) Addendum to Lease
Agreement dated December 16, 2012 (the “Second Addendum”), (vi) Addendum to Lease Agreement dated May 20, 2013 (the
“Third Addendum”), (vii) Addendum to Lease Agreement dated January 12, 2014 (the “Fourth Addendum”), (viii) the
Addendum to Lease Agreement dated January 12, 2014 (the “Fifth Addendum”), (ix) the Addendum to Lease Agreement dated
December 27, 2015 (the “Sixth Addendum”), (x) the Addendum to Lease Agreement dated December 28, 2015 (the “Seventh
Addendum”), (xi) the Addendum to the Lease Agreement dated October 17, 2017 (the “Eighth Addendum”) and (xii) the
Addendum dated February 21, 2018 (the “Ninth Addendum”) (collectively, the “Lease Agreement”).
● Subject Matter of the Lease Agreement: Unprotected lease of spaces on the ground floor and on the first floor of the building described in the Lease
Agreement located at 10 and 12 Ha’Amal Street, Rosh Ha’Ayin, Israel that will be used by the Company for offices and parking spaces.
● Term of Lease Agreement:
○ The term of the Original Lease was eight (8) years commencing on the delivery date (the “Original Lease Period”). The Company had the right
to terminate the lease as of the end of the fifth year of the Original Lease Period, subject to six months prior written notice, provided that the
Company pays a one-time special early termination payment (the “Special Payment”) equal to the balance of the rest of the Improvement
Amount (as defined below) per square meter multiplied by two times the number of remaining months for which the Company is required to pay
rental fees.
○ As of the end of the third year of the Original Lease Period, the Company has the right to sub-lease the premises to a substitute tenant, subject to
the Landlord’s prior written consent (not to be unreasonably withheld).
○ Estimated delivery date was to be May 10, 2008, but delivery occurred in August 2008.
○ The term of the Original Lease Period expires on August 31, 2016 and the term of the period with respect to all of the addenda is also August
31, 2016.
○ Pursuant to the Sixth Addendum, the Original Lease Period was extended to December 31, 2020. Unless one party notifies the other at least 180
prior to the end of the Original Lease Period, the Lease Agreement shall be automatically extended for an additional term of five (5) years (the
“Optional Lease Period”)
● Premises Covered by the Lease Agreement:
○ As set forth in Exhibit A, beginning on the date of the Original Lease Agreement and over the period of the remaining addenda forming the
Lease Agreement, the Company leased a total of 3,661 square meters.
○ Pursuant to the Seventh Addendum, the Company leased an additional 2,918 square meters (the “Additional Property”).
Pursuant to the Eighth Addendum, the Company and the Landlord reached an agreement with respect to the actual square meters leased by the
Company pursuant to a measurement the Landlord conducted. According to the Eighth Addendum the Company leases 7,605 square meters.
The Company was required to pay a one-time lump sum of NIS 482,351 for the excess premises.
○ Pursuant to the Ninth Addendum, the Company leased additional 25.2 square meters (the “New Property”)
○ The Company originally leased ninety-eight (98) parking spaces, and currently leases one hundred and sixty nine (169) parking spaces.
● Right Of First Refusal:
○ If the Landlord decides to lease additional spaces in the building, the Company will be given the right of first refusal regarding parts of those
additional spaces as listed below:
■ Out of the spaces that will be offered for lease on the ground floor – the Company will be given the right of first refusal with respect to
space of at least 500 square meters which are adjacent to the Property. Out of the spaces that will be offered for lease in the first floor – the
Company will be given the right of first refusal with respect to space of at least 800 square meters which adjacent to the Property.
■ In accordance with the Seventh Addendum, out of spaces that will be offered for lease on the second floor, the Company will be given the
right of first refusal with respect to space of at least 500 square meters which are adjacent to a specific portion of the Additional Property.
○ This right of first refusal will not be transferred to a substitute tenant if there will be such will be in the future under a sublease or transfer of the
lease.
● Rental Fees:
○ Under Appendix B to the Original Lease Agreement, which set the basic rental fees mechanism, the Company was to pay, at the first day of each
month the amounts as listed in Exhibit A hereto.
○ The Basic Rental Fees were increased upon the execution of the addenda pursuant to which the Company leased additional space. The details of
such increases are set forth on Exhibit A hereto.
○ The monthly rental fees for the parking spaces are detailed in Exhibit A hereto.
○ VAT and Consumer Price Index – All rental fees are plus VAT and are linked to the Israeli Consumer Price Index.
● Improvements:
○ According to the First and Second Addendums, the space leased thereunder is leased in an “AS-IS” condition. The Company carried out
improvements on such spaces at its own expense.
○ According to the Seventh Addendum, the Landlord agreed to participate in certain costs of improvement of common areas.
○ According to the Ninth Addendum, the space leased thereunder is leased in an “AS-IS” condition.
● Guarantees:
○ All the Guarantees that were provided by the Company are detailed in Exhibit A.
● Dispute Resolution
○ The parties agree that any competent court in Tel Aviv is chosen by them as exclusive jurisdiction in any matter relating to the Lease Agreement.
● Other Terms under the Lease Agreement:
○ The Company shall bear all fees, municipal or local taxes, utility payments etc., associated with the management of the company’s business
during the term of the Original Lease Period.
○ The Landlord shall bear all fees, municipal or local taxes, utility payments etc., which are levied on the Landlord by law.
○ Each party has agreed to assume responsibility for any damage, injury or loss (bodily or otherwise) resulting from any act, omission or
negligence on its part, and with respect of the Company relating to its use of the Premises.
2
Space that
has been
leased in
square meters
(gross)
Space that
has been
leased in
square feet
Original Lease Agreement 17.12.2007
1,300
14,000
Rental fees
for the
leased space.
Included in Sixth
Addendum Below
Parking
space that
has been
leased
Rental fees
regarding
parking space
Guarantees*
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
First Parking Space Addendum
Second Parking Space Addendum
First Addendum 8.3.2012
Third Parking Space Addendum”
-
-
463
-
-
-
5,000
-
Second Addendum 19.12.2012
414
4,400
Third Addendum 20.5.2013
169 + 205
4,000
Fourth Addendum 12.1. 2014
85
900
Fifth Addendum 12.1.2014
745
8,000
Sixth Addendum 27.12.2015
-
-
Seventh Addendum 28.12.2015
2,918
31,409
Eighth Addendum 17.10.2017
7,698
Ninth Addendum 21.2.2018
25.2
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Total 145
parking
spaces
Current Rate: NIS 140
per month for covered
parking space NIS 350
per month for reserved
parking space NIS 185
per month for uncovered
parking space
Aggregate bank guarantee
of NIS 832,699 and
promissory note of NIS
3,330,279
(i) bank guarantee in the
amount of NIS 546.933
and (ii) two promissory
notes in the amount of
NIS 2,187,730 each
Total 169
parking
spaces
NIS 350 per month per
parking space (if Kornit
uses parking spaces
currently rented out)
6 parking spaces – NIS
140 per space;
20 parking spaces – NIS
350 per space;
90 parking spaces – NIS
185 per space;
35 parking spaces – NIS
185 per space;
10 parking spaces –
without consideration
All fees are linked to the
October or August 2015
CPI and exclude VAT.
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Extension of term of
Lease - with rental fees as
follows:
●NIS 153,762 from the
date of the addendum
until 30.11.18
● NIS 157,423 from
1.12.18 until the end of
the current period
● NIS 165,294 from
1.1.21 until 31.12.25
NIS 105,048 during the
current period and NIS
110,300 during the option
period
For September 2017 –
NIS 408,467
For 3,339 square meters:
October 2017 –
December 31, 2020 ––
NIS 36 per square meter;
January 1, 2021-
December 31, 2025 – NIS
37.8 for square meter.
For 4,266 square meters:
October 1, 2017 –
November 30, 2018 –
NIS 42 for square meter;
December 1, 2018 –
December 31, 2020 - NIS
43 for square meter;
January 1, 2021 –
December 31, 2025 – NIS
45.15 for square meter.
The rent fees are linked to
the CPI of October 2015
and exclude VAT.
February 25, 2018 –
December 31, 2020 – NIS
36 per square meter.
January 1, 2021 –
December 31, 2026 – NIS
37.8 per square meter.
Additional management
fees – NIS 13 per square
meter.
3
Exhibit 4.8
English Summary of the Lease Agreement dated as of March 25, 2010 by and between Benbenishti Engineering Ltd. (the
“Landlord”) and Kornit Digital Ltd. (the “Company”) (the “Original Lease Agreement”), as amended by an Addendum dated
November 21, 2011, by an Addendum dated September 16, 2014, by an Addendum dated March 3, 2015 and by an Addendum
dated August 31, 2017 (collectively, the “Lease Agreement”).
● Subject Matter of the Original Lease Agreement: Unprotected lease of the ground floor in the Building (as defined in the Original Lease Agreement)
and 10 Parking Spaces (the “Original Premises”) that will be used by the company for the purpose of manufacture and storage of ink products.
Premises are located in Kiryat Gat, Israel.
● Term of Original Lease Agreement:
○ The term of the Original Lease Agreement is five (5) years commencing on June 1, 2010 and ending on May 30, 2015 (the “Original Lease
Period”).
○ The Company was given the option to extend the term of the Original Lease Period by a three (3) years period, ending on May 30, 2018 (the
“Extension Period”). This extension option is subject to the condition that the Company will provide a written notice, at least 120 days
before the end of the Original Lease Period.
○ The Company exercised its right to extend the Original Lease Period.
● Addendums to the Original Lease Agreement:
○ On November 21, 2011, the Company and the Landlord signed an Addendum to the Original Lease Agreement, in which the company
leased additional premises on the first floor of the Building (also in an unprotected lease) (the “Additional Premises Lease” and together
with the Original Premises, the “Premises”).
○ The term of the Additional Premises Lease was three (3) years, commencing on March 1, 2011 (the “Additional Premises Lease Period”).
○ The Company was given the option to extend the term of the Additional Premises Lease Period by a two (2) year period, ending on May 30,
2015. The Company subsequently exercised this option.
○ On September 6, 2014, the Company was given an additional option to extend the term of the Additional Premises Lease Period by a three
(3) year period, ending on May 30, 2018.
On March 16, 2015, the Company was given an additional option to extend the term of the lease of the Premises by a three (3) years period,
ending on May 31, 2021.
On August 31, 2017, the Company and the Landlord agreed that the lease of the Premises will be extended until May 31, 2021 and the
Company was given an additional option to extend the term of the lease by a three (3) year period, ending on May 31, 2024. During this
option period, the Company shall be entitled to terminate the lease by providing 180 days prior notice to the Landlord.
● Premises Covered by the Lease Agreement:
○ Under the Original Lease, the Company leased 1,082.5 square meters (gross) (approximately 11,500 square feet) and 10 Parking Spaces.
Pursuant to the Original Lease, the property was leased to the Company in an “AS-IS” condition, except for a 100 square meters space
inside the property that was needed for renovation in order to accommodate it to office space.
○ In addition, beginning in March 2011, the Company leased the Additional Premises, which is comprised of 291 square meters (gross)
(approximately 3,100 square feet).
● Rental Fees:
○ Under the terms of the Lease Agreement, during the first two (2) years of the Original Lease Period, the monthly rental fees for the Original
Premises were NIS 30 per square meter plus VAT for the Original Premises and, through November 1, 2013, 26 NIS plus VAT per square
meter for the Additional Premises (the “Basic Rental Fee”).
○ From the period beginning on June 1, 2012 with respect to the Original Premises and the period beginning November 2, 2013 with respect
to the Additional Premises, the Basic Rental Fee increases each year by 2.5% compared to the Basic Rental Fee in the previous year.
○ From the period beginning June 1, 2015 and ending May 31, 2016, the monthly rental fees for the Premises were NIS 34.19 per square
meter plus VAT (the “Updated Basic Renal Fee”).
Commencing on June 1, 2016, the Updated Basic Rental Fee increases each year by 2% compared to the Updated Basic Rental Fee in the
previous year.
○ In all cases, rental fees shall be increased (but not decreased) based on changes to the Israeli Consumer Price Index.
● Guarantees:
○ Under the Lease Agreement, the Company provided to the Landlord (i) three (3) promissory notes for NIS 75,000 each; (ii) an
unconditional bank guarantee in the amount of NIS 120,000, index-linked to the Israeli Consumer Price Index, which is to be valid for
fourteen (14) months, and to be extended by the Company to remain in effect for the duration of the term of lease and for sixty (60) days
thereafter; and (iii) a cash deposit equal to two (2) months’ rental fee.
● Other Terms under the Lease Agreement:
○ The Company has a right to sub-lease parts of the premises, subject to the Landlord’s prior written consent (not to be unreasonably
withheld), provided that the Company will remain responsible for fulfilling all of its obligations under the Lease Agreement. The Company
may also transfer its rights to the premises to a substitute tenant on terms that are no less favorable than the terms of the Lease Agreement
and subject to the Landlord’s prior written consent (not to be unreasonably withheld), provided that the lease period of the substitute tenant
will be shorter or coincide with the lease period under the Lease Agreement and that the Company will remain responsible for all of its
obligations for the Landlord under this agreement.
○ The landlord has a right to sell or otherwise transfer the property to a third party provided that the transferee will accept all of the Landlord’s
obligations under the Lease Agreement and that the Company’s rights under the Lease Agreement will not be affected.
○ The Company agreed to assume responsibility for all fees, municipal or local taxes, utility payments and other similar fees or expenses;
provided that the Landlord shall bear any and all taxes and fees.
○ Each party has agreed to assume responsibility for any damage, injury or loss (bodily or otherwise) resulting from any act, omission or
negligence on its part and the Company has assumed all such responsibility relating to its use of the Premises.
Exhibit 4.16
LEASE
BETWEEN
BONANNO REAL ESTATE GROUP I, L.P., Landlord
- and -
KORNIT DIGITAL NORTH AMERICA, INC., TENANT
Dated: December _____, 2017
TABLE OF CONTENTS
ARTICLE I Demise of Premises
ARTICLE II Term of Lease
ARTICLE III Rent
ARTICLE IV The Demised Premises
ARTICLE V Use
ARTICLE VI Quiet Enjoyment
ARTICLE VII Additional Rent, Taxes, Assessments, Water Rates, Charges, Etc.
ARTICLE VIII Insurance
ARTICLE IX Repairs
ARTICLE X Casualty
ARTICLE XI Condemnation
ARTICLE XII Compliance With Laws, Etc.
ARTICLE XIII Subordination/Estoppels
ARTICLE XIV Defaults, Remedies
ARTICLE XV Assignment and Sublease
ARTICLE XVI Notices
ARTICLE XVII Holding Over
ARTICLE XVIII Liens
ARTICLE XIX Condition of Demised Premises, Loss, Etc.
ARTICLE XX Inspection, For Sale and For Rent Signs
ARTICLE XXI Signs
ARTICLE XXII Advance Rent, Security and Late Charge
ARTICLE XXIII Financial Statements
ARTICLE XXIV Broker
ARTICLE XXV Commencement Date Agreement
ARTICLE XXVI Waiver of Jury Trial/Non-Mandatory Counterclaims
ARTICLE XXVII Waiver of Distraint
ARTICLE XXVIII Landlord’s Retained Rights
ARTICLE XXIX Miscellaneous
ARTICLE XXX Personal Liability
ARTICLE XXXI Rent Concession
ARTICLE XXXII Intentionally Omitted
ARTICLE XXXIII Guaranty
ARTICLE XXXIV Cancellation Option
i
Page
1
1
2
4
7
8
8
10
15
19
20
20
26
26
30
33
33
34
34
34
35
35
36
36
37
37
37
37
39
43
43
43
43
44
ADA
Additional Rent
Additional Security
Alternative Parking
and/or
Approved Tenant Plans”
Bankruptcy Event
Basic Rent
Building”
Capital Repair
Commencement Date
Demised Premises
Device
Event of Default
exclude
excluding
Execution Date
First Renewal Term
Gov’t Incentives
Incentive Termination Notice
include
including
Issuing Bank
Landlord
Landlord’s Adjacent Property
Late Charge
Legal Requirements
LL Roof Repair Work
MAI
Non-Extension Notice
Overnight Courier
Property Insurance
Real Property
Rent
Rent Commencement Date
repairs
Satisfactory Letter of Credit
Second Renewal Term
Security Deposit
SNDA
Tenant Delay
Tenant’s Work
Tenant”
Term”
INDEX OF DEFINITIONS
ii
2
35
42
5
2
4
16
1
1
38
42
42
1
42
42
1
36
21
33
10
1
2
2
15
35
26
1
5
1
1
THIS LEASE, dated the _____ day of December ____, 2017 (“Execution Date”), between BONANNO REAL ESTATE GROUP I, L.P., a New
Jersey limited partnership, with offices at 107 West Tryon Avenue, Teaneck, New Jersey 07666 (hereinafter referred to as the “Landlord”); and KORNIT
DIGITAL NORTH AMERICA, INC., a Delaware corporation, with offices at 10541-10601North Commerce Street, Mequon, WI 53092, USA (hereinafter
referred to as the “Tenant).
W I T N E S S E T H:
ARTICLE I
Demise of Premises
Section 1.01. The Landlord, for and in consideration of the rents to be paid and of the covenants and agreements hereinafter contained to be
kept and performed by the Tenant, hereby demises and leases unto the Tenant, and the Tenant hereby hires and takes from the Landlord, for the term and the
rent, and upon the covenants and agreements hereinafter set forth, the premises described in Exhibit A attached hereto and made a part hereof (such premises
together with the Building and Real Property, both as hereinafter defined being hereinafter referred to as the “Demised Premises”), which is situated on that
certain parcel of land located at 480 South Dean Street, in the City of Englewood, County of Bergen, State of New Jersey and a portion of the land located at
470 South Dean Street, in the City of Englewood, County of Bergen, State of New Jersey (hereinafter referred to as the “Real Property”), subject to and
together with the following:
(a) Zoning regulations and ordinances of the governmental subdivision(s) in which the Demised Premises lie; and
(b) Covenants, restrictions, conditions, easements and party wall agreements of record, if any.
ARTICLE II
Term of Lease
Section 2.01. The term of this Lease and the demise of the Demised Premises shall be for ten (10) Lease Years beginning on February 1,
2018 provided that Landlord has satisfied the Delivery Conditions (hereinafter defined) (the “Commencement Date”), and ending at 11:59 p.m. on the last
day of the tenth (10th) Lease Year or on such earlier or later commencement or termination as hereinafter set forth (which term, as same may be renewed or
extended, is hereinafter called the “Term). If for any reason other than Force Majeure or a Tenant Delay (as hereinafter defined) the Demised Premises are not
delivered to Tenant with all of the Delivery Conditions satisfied and all of Landlord’s representations then being true and accurate on or before February 1,
2018, then and in such event, Tenant shall be entitled to one (1) day of free Monthly Basic Rent for every day of delay until such time as the Demised
Premises are delivered to Tenant in the condition required by this Section 2.01. If Landlord has not delivered the Demised Premises to Tenant in the condition
required by this Section 2.01 on or before April 30, 2018 subject to delay due to reasons of Force Majeure or Tenant Delay, then commencing on May 1, 2018
and thereafter until such time as Landlord delivers the Demised Premises to Tenant in the condition required hereunder, Tenant shall have the right to
terminate this Lease on not less than thirty (30) days prior written notice to Landlord, and on the date specified in Tenant’s notice, this Lease shall terminate
and the parties shall have no further rights or obligations hereunder, except that Landlord shall promptly refund to Tenant any Rent paid in advance and any
security deposited with Landlord, and this provision shall survive the expiration or earlier termination of the Lease. As used herein the term “Tenant Delay”
shall mean any delay that Landlord may encounter in commencing or performing any of Landlord’s obligations under this Lease, due to any acts or omissions
of Tenant, or any of its respective agents, employees, contractors, or subcontractors, which caused such delay and of which Landlord has given notice to
Tenant. Landlord shall notify Tenant in writing, of any Tenant Delay arising from any such acts or omissions within five (5) business days after Landlord
actually becomes aware that any such acts or omissions has resulted in Tenant Delay (and such notice shall specify in reasonable etail to the extent practicable
the cause of the delay).
1
ARTICLE III
Rent
Section 3.01. Beginning on the Rent Commencement Date Term Basic Rent shall accrue and be payable as follows:
LEASE YEAR
1
2
3
4
5
6
7
8
9
10
ANNUAL BASIC RENT
$142,605.00
$146,883.15
$151,289.64
$155,828.33
$160,503.18
$173,343.43
$178,543.74
$183,900.05
$189,417.05
$195,099.56
MONTHLY BASIC RENT
$11,883.75
$12,240.26
$12,607.47
$12,985.69
$13,375.27
$14,445.29
$14,878.65
$15,325.00
$15,784.76
$16,258.30
The aforesaid Monthly Basic Rent installments shall be payable in advance on the first day of each calendar month during the Term, except that a
proportionately lesser sum may be paid for the first month of the Term of this Lease if the Term commences on a date other than the first day of the month. As
used in this Lease, “Basic Rent” shall mean either Term Basic Rent, Annual Basic Rent or Monthly Basic Rent, as appropriate. The “Rent Commencement
Date” for Basic Rent shall mean the sixtieth (60th) day following the Commencement Date.
Section 3.02. The Tenant shall, and will, during the Term well and truly pay, or cause to be paid, to the Landlord, the installments of
Monthly Basic Rent as herein provided and all other sums that may become due and payable by the Tenant hereunder, at the time and in the manner herein
provided, without counterclaim, offset or deduction, unless expressly otherwise provided in this Lease. For purposes of this Lease, “Additional Rent” shall
mean all sums in addition to Term Basic Rent due and payable by the Tenant hereunder and shall be billed separately from Term Basic Rent due and payable
by the Tenant hereunder, although bills for Additional Rent and Basic Rent may be sent concurrently to Tenant. In the event of nonpayment of Additional
Rent, Landlord shall have all the same rights and remedies with respect thereto as are herein provided for in the case of the nonpayment of Term Basic Rent,
or of a breach of any covenant to be performed by the Tenant. As used herein the term “Rent” shall mean both the Term Basic Rent and Additional Rent.
2
Section 3.03. The Basic Rent payable by the Tenant pursuant to this Lease is intended to be net to the Landlord, and unless expressly
otherwise provided in this Lease, all other charges and expenses imposed upon the Demised Premises or incurred in connection with its use, occupancy, care,
maintenance, operation and control, including but not limited to the charges and expenses payable pursuant to Articles VII and VIII of this Lease, shall be
paid by the Tenant, excepting liens resulting from acts or omissions of the Landlord and other payments to be paid or obligations undertaken by the Landlord
as specifically provided in this Lease.
Section 3.04. The Basic Rent payable under this Lease shall be payable to Bonanno Real Estate Group I, L.P., at the office of the Landlord
at the address set forth in Section 16.01, or as may otherwise be directed by notice from the Landlord to the Tenant, given in accordance with the provisions
of Article 16 hereof, and shall be payable in such coin or currency of the United States of America as at the time of payment shall be legal tender for the
payment of public and private debts.
Section 3.05. Notwithstanding the foregoing, Landlord and Tenant agree that Tenant shall have the right, but not the obligation, at Tenant’s
sole option, to pay Rent by wire transfer to such accounts as Landlord shall designate upon Tenant’s request therefor. Landlord and Tenant shall complete and
sign all forms and other documentation required to effectuate the foregoing. Tenant shall pay all service fees and other charges (including charges for
insufficient funds) in connection with the foregoing. Notwithstanding the foregoing, Tenant acknowledges and agrees that it shall remain responsible to
Landlord for all payments of Rent pursuant to this Lease even if there are insufficient funds in Tenant’s bank account in any given month and such Rent shall
immediately be paid to Landlord upon written notice.
Section 3.06. Promptly after the Commencement Date and the Rent Commencement Date are determined, Landlord and Tenant, at either
Landlord’s or Tenant’s request, will execute an agreement with respect to each of the above dates. Tenant’s or Landlord’s failure or refusal to sign the same
shall in no event affect the determination of such dates or either party’s obligations hereunder.
3
ARTICLE IV
The Demised Premises
Section 4.01. The Demised Premises includes a building of approximately fifteen thousand eight hundred forty-five (15,845) gross square
feet (which building is hereinafter called the “Building”) previously erected thereon and the land upon which it is situated as more particularly described on
Exhibit A, which the Tenant acknowledges that it has inspected and is fully familiar with its condition and is leasing the same in an “AS IS” condition, except
that the Building shall be delivered (i) in “broom clean” condition, free and clear of all other leases (other than this one) and occupants (other than Tenant),
(ii) with all existing mechanical, electrical, and plumbing systems in working order, (iii) all heating, ventilating and air-conditioning (“HVAC”) equipment
which services the office portion of the Building (“Office HVAC”) in good operating condition, subject to the following provisions of this Section 4.01 and
(iv) Landlord’s representations set forth in Section 4.04 hereof shall be true and accurate on the date of delivery of possession of the Demised Premises to
Tenant (all of the foregoing hereby collectively referred to as the “Delivery Conditions”). Landlord shall notify Tenant not less than ten (10) business days in
advance of the date on which Landlord will deliver possession of the Demised Premises to Tenant in the condition required and the parties shall arrange a
mutually convenient time for a joint inspection of the Demised Premises to confirm that the Delivery Conditions have been satisfied. In the event that the
inspection discloses that any of the existing mechanical, electrical, and plumbing systems are not in working order, Landlord shall have until April 1, 2018
(subject to Force Majeure and Tenant Delays) to perform the work necessary, at Landlord’s sole cost and expense, to place such systems in working order and
Tenant agrees that the Commencement Date will occur prior to the performance and/or completion of the work required to place such systems in working
order. If such repairs are required and if Landlord fails to make or complete the repairs by April 1, 2018 (subject to Force Majeure and Tenant Delays), then
Tenant shall send Landlord a reminder stating in BOLD AND CONSPICUOUS letters that Landlord’s failure to commence making the repairs within five (5)
business days from such reminder notice will constitute Landlord’s agreement that Tenant shall undertake the requisite repairs at Landlord’s sole cost and
expense, but without profit or mark-up to Tenant. Landlord shall reimburse Tenant for Tenant’s actual out-of-pocket costs within thirty (30) days after receipt
of a bill therefor accompanied by reasonable substantiation of the charges therein. If Landlord shall fail to pay Tenant after receipt of a reminder notice stating
in BOLD AND CONSPICUOUS letters that Landlord’s failure to do so will entitle Tenant to deduct same from Rent, Tenant may deduct the amount so owed
from the next due installments of Basic Rent however, in no event shall Tenant deduct more than twenty (20%) percent from each monthly installment until
such time as Tenant has been fully reimbursed. As soon as practicable following the Execution Date, weather permitting, Landlord shall, at its sole cost and
expense, replace the roof membrane, and to the extent necessary, insulation and portions of the roof deck, so as to make the roof watertight (hereinafter
collectively referred to as the “LL Roof Repair Work”. Neither the LL Roof Repair Work nor the Office HVAC repairs shall be a Delivery Condition and
Tenant agrees that the Commencement Date will occur prior to the performance and/or completion of the Office HVAC repairs, if required, and the LL Roof
Repair Work. Tenant agrees to cooperate with Landlord and Landlord’s contractors so as not to delay (by more than a de minimis amount) the progress of the
Office HVAC repairs and LL Roof Repair Work, and Landlord shall use all commercially reasonable efforts to complete the Office HVAC repairs and LL
Roof Repair Work as expeditiously as possible, and, with respect to LL Roof Repair Work, no later than June 1, 2018 (subject to Force Majeure and Tenant
Delays), and with minimal interference with Tenant’s access to, and use and occupancy of the Demised Premises. Tenant’s cooperation shall include, but not
be limited to, providing access to the Demised Premises as needed; provided however, Tenant shall not be required to relocate Tenant’s employees nor
Tenant’s equipment in connection with the LL Roof Repair Work. Landlord’s and Tenant’s responsibilities regarding compliance with Legal Requirements (as
hereinafter defined) is set forth in Section 12.02.
Premises twenty-four (24) hours a day, seven (7) days a week. Tenant shall have sole and exclusive use of all parking spaces at the Demised Premises.
Section 4.02. Subject to applicable governmental laws, rules, statutes, ordinances, and regulations Tenant shall have access to the Demised
4
Section 4.03. The Demised Premises hereinabove described constitutes a self-contained unit and nothing in this Lease shall impose upon
the Landlord any obligation to provide any services for the benefit of the Tenant, including but not limited to water, gas, electricity, heat, janitorial or garbage
removal, or internet service unless and to the extent expressly provided for in this Lease.
Section 4.04. i) Landlord, to its knowledge, hereby represents and warrants to Tenant as of the Execution Date as follows:
statute, ordinance, or regulation affecting the Demised Premises.
(i) Landlord has received no notice within the past twenty-four (24) months of any violation of any governmental law, rule,
(ii) With the exception of the LL Roof Repair Work, including without limitation, the replacement of the roof membrane and
those portions of the roof deck requiring patching or replacement, if any, currently there are no structural repairs required to be made to the Demised
Premises;
(iii) The Building is in compliance with all governmental laws, rules, statutes, ordinances, and regulations;
installed in the Demised Premises and are all in working condition; and
(iv) All meters for receiving and measuring electricity, gas and water and all conduits necessary for Internet service are already
plumbing systems, and any life safety systems within the Demised Premises are in operating condition.
(v) Except as otherwise noted herein with respect to the required repairs to the Office HVAC and the mechanical, electrical and
Section 4.05. Tenant shall, at its sole cost and expense, perform all initial improvements to the Demised Premises described on Exhibit C
(herein “Tenant’s Work”), which improvements Landlord hereby approves.
Section 4.06. Prior to commencing any improvement work, Tenant, at its sole cost and expense, shall obtain all necessary governmental
approvals required for the performance of the Tenant’s Work, and, upon request, shall provide Landlord with copies thereof. Landlord shall cooperate and
promptly execute and return all applications requiring Landlord signature thereon provided the information contained therein relating to Landlord is accurate.
All Tenant’s Work performed by Tenant shall be performed in compliance with all applicable codes, rules and regulations and with the quality of
workmanship and materials consistent with the character and integrity of the Building. Tenant agrees to carry and will cause Tenant’s contractors and
subcontractors to carry such workmen’s compensation, general liability, personal and property damage insurance as Landlord may reasonably require. If any
mechanic’s lien is filed against the Premises or the Building of which the same form a part, for work claimed to have been done for, or materials furnished to,
Tenant, the same shall be discharged by Tenant within thirty (30) days thereafter, at Tenant’s expense, by payment thereof or filing a bond and, in addition,
Tenant shall take all necessary steps required by law to permanently discharge said lien. Except as set forth in Section 4.07 below with respect to any
reconfiguration or expansion of the office area by Tenant, Tenant shall not be required to remove any of Tenant’s Work listed on Exhibit C and/or shown on
the plans approved therefor, which plans, once approved by Landlord, shall be attached hereto as Exhibit C-1 and made a part hereof (the “Approved Tenant
Plans”). If and to the extent Tenant elects to remove any installations made to the Demised Premises, it shall repair all damage caused in connection with the
installation or removal thereof.
5
Section 4.07. In the event that Tenant elects to improve or expand the office portion of the Demised Premises or perform any other initial
leasehold improvements as part of Tenant’s Work, the following shall apply:
(a) Tenant shall, at its own cost and expense prepare and submit to Landlord, two (2) sets of proposed plans and specifications covering
the Tenant’s Work. Tenant’s Work shall comply with the requirements set forth in this Lease, including, without limitation, Article 12. Within ten (10)
business days after receipt of initial plans and specifications, or within five (5) business days after receipt of any re-submitted plans and specifications,
Landlord shall either: (i) approve said plans and specifications in writing or by signing or initialing one set thereof and returning such set to Tenant (and such
approved preliminary plans and specifications shall then constitute the final plans and specifications), or (ii) disapprove said plans and specifications in
writing to Tenant (and with detail as to the specific reasons for disapproval). If Landlord disapproves, Landlord shall advise Tenant of those revisions which
Landlord requires within the time frameworks set forth above, and Tenant shall, at Tenant’s sole cost and expense, within thirty (30) days thereafter, submit
two (2) sets of revised plans and specifications to Landlord for its approval in accordance with the preceding provisions of this Section. If Landlord fails to
respond to Tenant in accordance with this provision within five (5) business days after receipt, with respect to initial plans or three (3) business days after
receipt of revised plans, Tenant may send a second reminder stating in BOLD AND CONSPICUOUS letters that Landlord’s failure to respond within three
(3) business days from such reminder notice will constitute Landlord’s approval of the plans and specification and if Landlord fails to respond within such
three (3) business day period, Landlord shall be deemed to approve the plans and specifications. If Tenant elects to make additional improvements to the
Demised Premises during the Term (other than those set forth on Exhibits C and, to the extent those items on Exhibit C are detailed on Exhibit C-1), Landlord
agrees that if so requested by the Tenant at the time consent is granted to the improvements, Landlord will advise Tenant what portion of the work so
consented to will be required to be removed by Tenant at the expiration or sooner termination of the Lease. If Landlord fails to do so within ten (10) business
days of Tenant’s request, Tenant may send Landlord a reminder stating in BOLD AND CONSPICUOUS letters that Landlord’s failure to respond within three
(3) business days from such reminder notice will constitute Landlord’s agreement that the specified improvements need not be removed by Tenant at the
expiration or earlier termination of the Term and if Landlord fails to respond within such three (3) business day period, Tenant shall not be required to remove
such improvements. Tenant acknowledges and agrees that with respect to any reconfiguration or expansion of the office area by Tenant, Landlord will
indicate on Exhibit C-1 or by a supplemental writing at the time it approves Exhibit C-1, what portion of the work so consented to will be required to be
removed by Tenant at the expiration or sooner termination of the Lease.
(b) Tenant shall obtain all permits and approvals for the performance of Tenant’s Work, including a building permit. Tenant shall file for
a building permit necessary for the performance of Tenant’s Work after Landlord’s written approval of the plans and specifications for Tenant’s Work which
will then be appended to this Lease as Exhibit C-1. Tenant shall give Landlord copies of each application submission at least three (3) business days before
filing same.
6
(c) Tenant shall advise Landlord of any communications with the municipal planning board or building department incident to
applications for permits and approvals. Tenant shall deliver to Landlord copies of all permits and approvals, including but not limited to its building permit,
prior to Tenant’s Work. Tenant’s Work shall be performed in a good and workmanlike manner using quality materials, in compliance with all Legal
Requirements, and at Tenant’s sole and exclusive risk and cost. Notwithstanding the foregoing or anything in this Lease to the contrary, if there are violations
against the Demised Premises which prohibit Tenant from obtaining a building permit to perform Tenant’s Work which violations are due to conditions
antedating or existing on the Commencement Date, but not due to the acts or omissions of Tenant or any of its contractors, employees or agents, then
Landlord, at Landlord’s sole cost and expense, shall promptly take all actions necessary to have such violations removed, and except for the foregoing (which
shall delay the Rent Commencement Date on a day for day basis for each day for which Tenant is unable to obtain the requisite permits to perform Tenant’s
Work), Tenant acknowledges that any delay in completing the Tenant’s Work will not delay the Rent Commencement Date.
(d) On completion of Tenant’s Work, Tenant shall close out all permits and furnish Landlord with documentation from the applicable
governmental authorities confirming the work has been properly performed. Tenant shall also promptly deliver to Landlord, final lien waivers from the
general contractor and all subcontractors and material suppliers, and to the extent applicable, “AS BUILT” plans together with CAD plans.
ARTICLE V
Use
Section 5.01. The Demised Premises may be used for office space and for the operation of a demonstration facility (showroom) and for all
uses ancillary thereto, including the storage of chemical solutions for the sole purpose of operating the equipment being demonstrated (the approximate
amounts of the chemicals to be so stored are set forth on Exhibit D attached hereto and made a part hereof), employee pantries, computer rooms, and mail
rooms, and for no other use or purpose (the “Permitted Use”). In no event will Tenant conduct manufacturing at the Demised Premises and periodic sales
demonstrations of Tenant’s printing and copying equipment shall be permitted and not be deemed to be manufacturing for the purposes of this Lease.
Notwithstanding anything to the contrary, the Landlord makes no representation that the Demised Premises may be used for those purposes set forth in this
Section 5.01. Subject to the provisions of Section 4.04 and Section 4.07(c) hereof, Tenant, at its sole cost and expense, shall be responsible for obtaining any
and all certificates and/or permits sanctioning Tenant’s use from any governmental agencies having jurisdiction over the Demised Premises, including by way
of example, but not limitation, a Continuing Certificate of Occupancy for the Demised Premises, and Landlord shall promptly cooperate with Tenant’s efforts
to obtain same provided Landlord shall not incur any cost or expense in connection therewith or, if there exists any cost therefore, Tenant agrees in writing to
pay for same as Additional Rent within thirty (30) days from being billed. The Tenant shall not use or permit to be used the Demised Premises or any part
thereof for any purpose other than the uses described in the first sentence of this Section. In no event shall Tenant store any products, materials, machinery,
equipment or inventory or perform any activities outside of the Building, except with respect to alterations or repairs, permitted under this Lease pertaining to
the exterior of the Building, or landscaping, or the parking lot.
7
ARTICLE VI
Quiet Enjoyment
Section 6.01. The Landlord covenants that if, and as long as, the Tenant pays the Term Basic Rent, and any Additional Rent as herein
provided, and performs the covenants hereof, the Landlord shall do nothing to affect the Tenant’s right to peaceably and quietly have, hold and enjoy the
Demised Premises for the Term herein mentioned, subject to the provisions of this Lease.
ARTICLE VII
Additional Rent, Taxes, Assessments,
Water Rates, Charges, Etc.
Section 7.01. Commencing on the Rent Commencement Date, the Tenant shall pay, before any interest or penalties accrue thereon, all Real
Estate Taxes, as hereinafter defined in Section 29.13, and all operating costs relating to the Demised Premises including by way of example but not limitation,
all domestic water charges, gas and electricity charges, fire sprinkler standby charges, sewer rates and charges, parking lot repairs, parking lot maintenance
and lighting, landscaping and snow removal, and all other charges relating to the maintenance and repair of the parking lot, and such other costs and expenses
not expressly stated in this Lease to be the obligation of the Landlord (all of the foregoing collectively referred to as “Operating Costs”). Tenant shall pay
such Operating Costs directly to the utility or other service provider, or other entity or authority assessing such charges. Tenant acknowledges that all wiring,
conduits, cables, pipes and other equipment and meters necessary for the provision of utilities and internet service to, and measurement of consumption of
utilities by Tenant are already installed at the Demised Premises. Tenant shall pay all such charges directly to the assessing authority or provider, as the case
may be, and upon reasonable prior written request therefor, Tenant shall furnish Landlord with copies of receipted bills or other proof of payment. There shall
be apportioned any tax or charge relating to the fiscal years in which the Term of this Lease commences and terminates. In the event Landlord directs Tenant
to pay any charges directly to an assessing authority or providing entity and Tenant fails to pay any of the foregoing items in a timely manner, then provided
that (x) Landlord has sent Tenant a reminder notice stating in BOLD AND CONSPICOUS LETTERS, that failure of Tenant to pay the specified charges
within five (5) business days after receipt of such notice shall entitle Landlord to pay same, and (y) Tenant’s failure to pay said charges within said five (5)
business day period, Landlord shall have the right but not the obligation to pay such amounts and charge Tenant, as Additional Rent, all sums expended by
Landlord. Real Estate Taxes are currently estimated to be $1.98 per square foot.
Section 7.02. The Tenant shall not be required to pay any estate, inheritance, devolution, succession, transfer, legacy or gift tax charged
against the Landlord or the estate or interest of the Landlord in the Demised Premises or upon the right of any person to succeed to the same or any part
thereof by inheritance, succession, transfer or gift, nor any capital stock tax or corporate franchise tax incurred by the Landlord, nor any income tax upon or
against the income of the Landlord (including any rental income derived by the Landlord from the Demised Premises but this exclusion shall not be
applicable to a sales tax or rental tax which shall be considered a Real Estate Tax).
8
Section 7.03. The Tenant shall pay all assessments that may be imposed upon the Real Property by reason of any specific public
improvement (including but not limited to assessments for street openings, grading, paving and sewer installations and improvements) except that if by law
such special assessment is payable, or may, at the option of the taxpayer, be paid, in installments, the Tenant may, whether or not interest accrues on the
unpaid balance thereof, elect to pay the same and any accrued interest on any unpaid balance thereof in the maximum number of installments and as each
installment becomes due and payable, but in any event before any penalty or cost may be added thereto for nonpayment of any installment or interest. If such
election to pay in installments can only be made by the fee owner, then Landlord shall elect to pay such assessment in the maximum number of installments.
Tenant shall only be liable for installments falling due during the Term. Any such benefit, assessment or installment thereof relating to a fiscal period in which
the Term of this Lease begins or ends shall be apportioned between the Landlord and the Tenant.
Section 7.04. The Tenant, in its name or the Landlord’s name, shall have the right to contest, or review, by appropriate proceedings, in such
manner as it may deem suitable, at its own expense, and without expense to the Landlord, any tax, assessment, water and sewer rates or charges, or other
charges payable by the Tenant pursuant to this Lease, and upon the request of the Tenant, and upon receipt by Landlord of the taxes payable by Tenant under
this Article, the Landlord will pay, under protest, any tax, assessment, water or sewer rent or charge, or any other charge payable by the Tenant pursuant to
this Lease, which shall be contested or reviewed by the Tenant. Any refund resulting from such contest or review shall be assigned to and belong to the
Tenant and shall be paid to the Tenant promptly upon its receipt by the Landlord notwithstanding that the Lease and Term may have expired. If the refund
relates to a tax year that is apportioned between the Landlord and the Tenant, the refund shall be apportioned between the Landlord and the Tenant. The
provisions of this Section shall survive the expiration of this Lease to the extent any refund payment is due Tenant for the period prior to the expiration of the
Term.
Section 7.05. Notwithstanding anything contained herein to the contrary, should Landlord’s mortgagee require at any time, the maintenance
of an escrow reserve for the tax obligations of Tenant or for any other obligation of Tenant as in this Lease contained, Tenant shall promptly pay to said
escrowee the required amount as the same may be periodically adjusted from time to time and upon request mortgagee or Landlord shall provide to Tenant
proof of payment to the taxing authority. For the avoidance of doubt, Landlord shall bear the costs of the escrow agent.
9
ARTICLE VIII
Insurance
Section 8.01. (a) The Landlord shall, during the Term of this Lease, cause the Demised Premises to be insured for the benefit of the
Landlord and any and all mortgagees of the Landlord and for the Tenant, as its interest may appear, “All Risk” or “Special Forms” property insurance against
damage or loss by fire, malicious mischief, sprinkler leakage and such other hazards and perils as now or hereafter may be included in a standard “extended
coverage” endorsement from time to time including boiler insurance and with a vandalism and malicious mischief endorsement (hereinafter referred to as
“Property Insurance”), in an amount not less than the full replacement value of an identical building (excluding Tenant improvements and alterations except
to the extent same constitute permanent fixtures that cannot be removed without causing damage to the Demised Premises that cannot be repaired after such
removal) constructed in accordance with all requirements, rules and regulations, which may be applicable at the time of any loss or damage, of all
governmental agencies having jurisdiction over the Building and construction of such Building and improvements. Landlord agrees that throughout the Term
as extended or renewed it shall maintain for its own benefit and at Landlord’s sole cost and expense, commercial general liability insurance, however, Tenant
shall not be named an additional insured on such policy.
(b) Such Property Insurance policies shall be issued by insurance companies licensed to do business in New Jersey with an A.M. Best
rating of A-VII or better. Commencing on Rent Commencement Date, Tenant shall pay, as Additional Rent, one hundred (100%) percent of the total premium
for the Property Insurance and endorsements promptly when billed. In addition, the Tenant shall pay the full amount of any increase in the Property Insurance
premiums pertaining solely to the entire Demised Premises and resulting from Tenant’s use. If the Tenant shall fail to pay the amount of such Property
Insurance premiums within ten (10) days after being billed by Landlord, then subject to Tenant’s receipt of a reminder notice, stating in BOLD AND
CONSPICOUS LETTERS, that failure of Tenant to pay the specified premiums within five (5) business days after receipt of such notice shall entitle
Landlord to pay same, and (y) Tenant’s failure to pay said charges within said five (5) business day period, the amount thereof may, but shall not be obligated
to be paid by Landlord, and any premiums so paid by Landlord shall be billed to Tenant and payable as Additional Rent, with such Additional Rent being due
and payable with the Monthly Basic Rent next coming due. Any deductible under such Property Insurance policies shall be paid for by the Tenant, to the
extent of one hundred (100%) percent of the amount thereof. Landlord’s represents that Landlord’s current Property Insurance policy covering the Demised
Premises provides for a Ten Thousand and 00/100 ($10,000.00) Dollar deductible. Landlord agrees to advise Tenant in the event of any increase in the
deductible; however Landlord shall not agree to an increase in any deductible for which Tenant is liable hereunder of more than twenty (20%) percent during
the initial Term, or more than twenty (20%) percent each of the Renewal Terms without the prior written consent of Tenant.
Section 8.02. (a) Commencing on Commencement Date, the Tenant shall maintain and keep in force, during the Term of this Lease, with
respect to the Demised Premises commercial general liability insurance policy in standard form, insuring against liability for personal injury, bodily injury,
broad form property damage, operations hazard, owner’s protective coverage, blanket contractual liability, products and completed operations liability. Said
policies shall be written by insurance companies licensed to do business in the State of New Jersey rated A-VII by A.M. Best Company, Oldwick, New
Jersey, and shall cover the entire Demised Premises and shall be in the minimum amount of Three Million and 00/100 ($3,000,000.00) Dollars for each
occurrence and shall contain provision for ten (10) days’ written notice by nationally recognized overnight courier service providing proof of delivery and
proof of receipt, or by certified (return receipt requested, postage pre-paid) or registered United States mail to the Landlord of any material change or
detrimental alteration in coverage, or cancellation or other termination of said policy. The said policies shall also contain an endorsement protecting the
Landlord for water damage and sprinkler damage liability with respect to property other than the Landlord’s. The Tenant shall name the Landlord, Landlord’s
managing agent and/or mortgagee[s] as an additional insured on its commercial general liability insurance policy. Tenant shall provide at all times current
certificates of insurance demonstrating compliance with the provisions of this Section and evidence of such coverage. Landlord reserves the right, not more
than once during the initial Term of this Lease or any Renewal Term, to require an increase in the aforesaid amount of insurance to an amount reasonable
under the circumstances considering the character and location of the Building and any significant change in Tenant’s use of the Demised Premises.
10
(b) Tenant represents, said representation being specifically designed to induce the Landlord to execute this Lease, that Tenant shall
insure its business against interruption and its Premises, improvements, alterations, personal property and fixtures and any other items which Tenant may
bring to the Demised Premises or which may be under Tenant’s care, custody and control which may be subject to any claim for damages or destruction,
which property value shall never exceed the amount of insurance which Tenant is required to carry pursuant to this Lease. If at any time the value of the
personal property, fixtures or other goods located at the Demised Premises shall exceed said amount, Tenant covenants to so notify Landlord and at the same
time increase the amount of insurance required to be carried pursuant to this Section 8.02 to an amount sufficient to cover the aforesaid. Should Tenant fail to
do so, or fail to maintain insurance coverage adequate to cover the aforesaid, then after receipt of notice and failure to cure, Tenant shall be in default
hereunder and shall be deemed to have breached its covenants as set forth herein.
Section 8.03. The Tenant shall provide and keep in force, during the Term of this Lease, for the benefit of the Landlord, boiler and
machinery insurance, if applicable. The Landlord shall be named as an additional insured under the policy, with respect to the Building. Upon failure at any
time on the part of the Tenant to procure any or all of the policies of insurance as provided in this Article, or to pay the premiums therefor, and provided that
(x) Landlord has sent Tenant a reminder notice stating in BOLD AND CONSPICOUS LETTERS, that the failure of Tenant to procure the requisite insurance
and/or to pay the premiums therefor within five (5) business days after receipt of such notice shall entitle Landlord to procure such insurance and to pay for
same, and (y) Tenant’s failure to do so within said five (5) business day period, then thereafter Landlord shall be at liberty from time to time as often as such
failure shall occur, to procure such insurance and pay the premiums therefor as herein provided with respect to procurement of fire and casualty insurance,
and all and any sums paid for such insurance by the Landlord together with interest thereon from date of payment shall be and become and are hereby
declared to be Additional Rent under this Lease, forthwith due and payable, and shall be collectible accordingly.
Section 8.04. The Landlord shall provide and keep in force during the Term of this Lease, for the benefit of the Landlord, an endorsement to
the insurance provided for in Section 8.01 for rental income insurance insuring the Landlord against the loss of Term Basic Rent and Additional Rent, as in
this Lease provided, from the perils of fire and extended coverage for a period of no less than one (1) year. The Tenant shall reimburse Landlord for the cost
of said insurance when billed. If the Tenant shall fail to pay the amount of such premiums within ten (10) days after being billed, the amount thereof shall be
added to the amount of the Term Basic Rent next coming due hereunder and shall be due and payable as part of said Term Basic Rent next coming due.
11
Section 8.05. Each such insurance policy carried by Landlord and each such insurance policy carried by Tenant insuring the Demised
Premises, its business against interruption, and its fixtures and contents against loss by fire, water and causes covered by standard extended coverage or all
risks endorsement insurance, shall be written in a manner so as to provide that the insurance company waives all right of recovery by way of subrogation
against Landlord or Tenant in connection with any loss or damage covered by such policies except, however, criminal acts. Neither party shall be liable to the
other and both parties hereby waive any claims against one another for any loss or damage caused by fire, water or any of the risks enumerated in standard
extended coverage insurance, all risks or special forms endorsement insurance, provided such insurance was obtainable at the time of such loss or damage. If
the release of either Landlord or Tenant, as set forth in the second sentence of this paragraph, shall contravene any law with respect to exculpatory
agreements, the liability of the party in question shall be deemed not released but shall be deemed secondary to the latter’s insurer.
Section 8.06. The Tenant shall also furnish insurance for such other hazards and in such amounts as the Landlord may reasonably require
and as at the time are commonly insured against with respect to buildings similar in character, general location and use and occupancy to the Demised
Premises in relative amounts normally carried with respect thereto. The Landlord reserves the right at any time and from time to time but not more frequently
than one time every five (5) Lease Years to require that the limits for any of the insurance required pursuant to this Article VIII be increased to limits as at the
time are reasonable with respect to Tenant’s use and to buildings similar in character, general location and use and occupancy to the Demised Premises.
Section 8.07. (a) Tenant is and shall be in exclusive control and possession of the Demised Premises as provided herein, and except as
otherwise provided herein Landlord shall not be liable to Tenant for any loss suffered by Tenant under any circumstances, including, but not limited to (i) that
arising from the negligence of Landlord, its agents, servants, invitees, contractors or subcontractors, or from defects, errors or omissions in the construction or
design of the Demised Premises including the structural and nonstructural portions thereof; or (ii) loss of or injury to Tenant or to Tenant’s property or that for
which Tenant is legally liable from any cause whatsoever, including but not limited to theft or burglary; or (iii) that which results from or is incidental to the
furnishing of or failure to furnish or the interruption in connection with the furnishing of any service which Landlord is obligated to furnish pursuant to this
Lease; or (iv) that which results from any inspection, repair, alteration or addition or the failure thereof undertaken or failed to be undertaken by Landlord; or
(v) any interruption to Tenant’s business, however occurring unless otherwise expressly otherwise provided for in this Lease.
(b) The aforesaid exculpatory Section is to induce the Landlord, in its judgment, to avoid or minimize covering risks which are better
quantified and covered by Tenant either through insurance (or self-insurance or combinations thereof if specifically permitted pursuant to this Lease), thereby
avoiding the need to increase the rent charged Tenant to compensate the Landlord for the additional costs in obtaining said coverage or reserving against such
losses. Notwithstanding anything in this Lease to the contrary, if Tenant shall be prevented from using or accessing, in whole or in part, the Demised Premises
as a result of any act or omission of Landlord, its employees, agents or contractors, which loss of use, or loss of access continues for five (5) consecutive days
following Landlord’s receipt of notice from Tenant of such condition, then Basic Rent and all regularly recurring Additional Rent shall abate until such time
as Tenant has regained full access to and full use of the Demised Premises. If Tenant’s use of the Demised Premises or access thereto is only partially denied,
Basic Rent and all regularly recurring Additional Rent shall abate proportionately to Tenant’s loss of use, or access.
12
losses, fees, costs and expenses (including reasonable attorneys’ fees) which may be imposed upon, incurred by or asserted against Landlord by reason of:
(c) Tenant shall indemnify, defend and save Landlord harmless against and from all liabilities, claims, suits, fines, penalties, damages,
(A) Any work or thing done in, on or about the Demised Premises or any part thereof by or on behalf of Tenant (but shall not
include any work done on the roof by or for Landlord, including, without limitation, the installation of the new roof membrane, or arising from or in
connection with the installation of solar panels on the roof by Landlord, or its employees, agents or contractors) nor any repair or work done by Landlord to
put Building Systems in working order;
(B) Any use, occupation, condition, operation of the Demised Premises or any part thereof if caused by Tenant, its agents,
employees, contractors or any person or entity over which Tenant has control or of any sidewalk or curb within the Demised Premises, or any occurrence on
any of the same on the part of Tenant;
subtenant of Tenant;
(C) Any negligent act or omission on the part of Tenant or any subtenant or any employees, licensees or invitees of Tenant or any
(D) Any accident, injury (including death) or damage to any third party or property owned by someone other than Tenant and
under the care, custody or control of Tenant occurring in, on or about the Demised Premises, or any part thereof (and, if anything shall be installed on or
affixed to the roof or any part thereof by Landlord or its agents, contractors or employees the roof and such installations shall not be deemed to be under the
care, custody or control of Tenant) unless caused by Landlord, its agents, contractors or employees; and
in this Lease.
(E) Any failure on the part of Tenant to perform or comply with any of the covenants, agreements, terms or conditions contained
(d) The provisions of this Section shall survive the expiration or earlier termination of the Lease.
13
Section 8.08. Landlord shall indemnify, defend and save Tenant harmless against and from all liabilities, claims, suits, fines, penalties,
damages, losses, fees, costs and expenses (including reasonable attorneys’ fees) which may be imposed upon, incurred by or asserted against Tenant arising
from any accident, injury (including death) or damage to any third party or their property occurring in, on or about the Demised Premises, or any part thereof,
if (a) caused in whole or in part by Landlord, or a Landlord Party or an affiliate of Landlord or any Landlord Party (as defined in Section 9.01) or any of its or
their agents, contractors or employees (and if only partially caused by Landlord, or any of the foregoing, its indemnity hereunder shall be equitably
apportioned), or (b) arising in whole or in part from the placement (whether or not permanently attached) of anything on or to any part of the roof or roof
structure.
Section 8.09. In the event any mortgagee, or trust deed holder requires an escrow for insurance, taxes or any other recurring charges, Tenant
shall, within thirty (30) days of receipt of Landlord’s notice of same, on demand from Landlord, deposit the required escrow as required by any of the
aforesaid.
Section 8.10. Any policies required to be furnished by Tenant pursuant to this Article VIII will unequivocally provide an undertaking by the
insurers to notify Landlord and the mortgagees of Landlord in writing not less than thirty (30) days prior to any material change, detrimental alteration,
cancellation, or other termination thereof.
14
ARTICLE IX
Repairs
Section 9.01. (a) The Tenant shall keep the Demised Premises in good condition and repair, and shall redecorate, paint and renovate the
Demised Premises as may be necessary to keep them in good condition and repair and good appearance. The Tenant shall keep the Demised Premises and all
parts thereof in a clean and sanitary condition and free from trash, inflammable material and, except as otherwise provided herein, other objectionable matter.
Tenant shall, at its sole cost and expense, throughout the Term of this Lease, as extended or renewed, maintain a dumpster for depositing its trash and refuse.
Under no circumstances will Tenant store any trash or refuse outside the Building except in such dumpster. The Tenant shall comply with all of the
requirements recommendations as announced from time to time by the engineering department or any other similar enforcement department of the fire
insurance company insuring the Demised Premises or any agencies or departments of the City of Englewood, including by way of example but not limitation
the health or fire department; provided however, if such compliance requires any alterations, maintenance, repair or replacement to any structural portions of
the Demised Premises which are the Landlord’s obligation under Section 9.04 of this Lease to maintain, then such compliance shall be performed by Landlord
at Landlord’s sole cost and expense unless arising from Tenant's specific use or particular method of doing business in the Demised Premises, Tenant’s Work
or due to any alterations, additions or improvements undertaken by Tenant in the Demised Premises, in which case, Landlord shall perform such alterations,
maintenance, repairs or replacements, but at Tenant’s reasonable cost and expense, without profit or mark-up to Landlord and Tenant shall pay such amount as
Additional Rent within thirty (30) days after receipt of a bill therefor and reasonable substantiation of the charges therein. Tenant, at its sole cost and expense
and after notice to Landlord, may contest by appropriate proceedings prosecuted diligently and in good faith, the requirements recommendations as
announced from time to time by the engineering department or any other similar enforcement department of the fire insurance company insuring the Demised
Premises or any agencies or departments of the City of Englewood, including by way of example but not limitation the health or fire department which Tenant
is required to comply under the terms of this Lease provided that no contest proceedings initiated by Tenant shall be conducted in such a manner as to cause a
lien against the Real Property or the risk of loss of the Real Property through sale or forfeiture, cause any interference with the use, occupancy, sale or
financing of the Real Property, cause a cancellation of Landlord’s insurance or subject Landlord to any fines, penalties or liability including criminal liability
or civil penalty and Tenant furnishes to Landlord security by way of cash, bond, or a letter of credit, reasonably satisfactory to Landlord, against any loss or
injury by reason of such contest or delay. The Tenant shall keep the sidewalks, and parking lot forming part of the Demised Premises clean and free of
obstructions, snow and ice. Except as otherwise in this Lease set forth, throughout the Term of this Lease, the Tenant, at its sole cost and expense, will take
good care of the nonstructural portions of the Demised Premises including by way of example but not limitation, the roof membrane and insulation (subject
however, to the provisions of Section 28.01), boiler, heating systems, plumbing systems, electrical system and fire protection sprinkler system, gas fired unit
heaters (which will be delivered on the Commencement Date in working order), rooftop Office HVAC units (subject to Landlord’s placement thereof into
good operating condition, and as otherwise set forth in this Lease), overhead doors, overhead door openers, exhaust fans, ventilating fans, plumbing fixtures,
lights, outlets, electrical panels, exit lights, emergency lights, exterior lighting, fences, irrigation system, landscaping, lawn treatment, tree trimming and weed
removal, and the sidewalks and curbs adjoining the Demised Premises and will keep the non-structural portions of same in good order and condition and
make all necessary repairs thereto, interior and exterior, ordinary and extraordinary, foreseen and unforeseen; provided however, that Tenant shall not be
required to make any structural repairs, any repairs necessitated by the negligent acts or omissions of Landlord, its agents, employees or contractors (each of
the foregoing a “Landlord Party” and collectively “Landlord Parties”, unless Tenant is reimbursed therefor by Landlord for Tenant’s costs and expenses),
any repairs or replacements covered under Articles X and XI hereof, or any other maintenance, repairs, replacements or compliance with Legal Requirements
which are the responsibility of Landlord under this Lease. Tenant shall quit and surrender and return the Demised Premises at the end of the Term “broom
clean” and in the same condition they were in at the commencement, subject to reasonable wear and tear, and damage by fire and other casualty excepted, and
further excepting any insured events or items for which Tenant is not liable. Additionally, subject to the provisions of Section 4.06, Tenant shall not be
required to remove nor restore Tenant’s Work as set forth on Exhibit C, nor restore or remove any alterations which, at the time Landlord’s consent thereto
was obtained, or if no consent was necessary, a written decision from Landlord on restoration was obtained, that Tenant need not restore or remove such
work. Tenant shall also not be obligated to return any HVAC serving the warehouse portion of the Demised Premises in operable condition however, the gas
fired unit heaters must be in operable condition subject to the limitation on Capital Repairs set forth below. In addition, the Tenant shall replace, at the
Tenant’s expense, all window and glass in and on the Demised Premises which may become broken after the date of Tenant’s occupancy; however if broken
by Landlord or any Landlord Party, Landlord shall reimburse Tenant for its reasonable cost and expense of replacing same, within thirty (30) days after
receipt of a bill therefor and reasonable substantiation of the charges therein. All repairs made by Tenant shall be equal in quality and class to the original
work. As used in this Lease, the term “repairs” shall also include all necessary replacements and renewals. Landlord agrees to make the roof warranty and
any warranties relating to the HVAC units or systems, if any, available to Tenant and shall cooperate in connection with the enforcement thereof provided
Landlord is not required to incur any costs or expenses in connection therewith. Landlord shall assign all other pertinent warranties to Tenant.
15
(b) Notwithstanding anything to the contrary in this Lease, if a replacement or a repair of the Office HVAC, boiler, parking lot
pavement, or any other Capital Improvement (each of the foregoing being referred to as a “Capital Repair”) is required at any time during the Term of the
Lease, which Capital Repair would cost Fifteen Thousand and 00/100 ($15,000.00) Dollars (U.S.) or more, Tenant shall only be required to pay for that
percentage of the cost of such Capital Repair as the then remaining Term of the Lease bears to the useful life of the Capital Repair, as determined pursuant to
the Internal Revenue Code of 1986, as amended, but which useful life, for purposes of this Section, is not to exceed ten (10) years in the case of any Capital
Repair. In the event the Term of this Lease is renewed subsequent to the determination of Tenant's share of the cost of such Capital Repair, then the parties
shall recalculate such share as if the Term of the Lease had been so extended at the time the replacement was made, and Tenant shall pay Landlord the
difference between that which it would have paid had the Term of the Lease been so extended at the time of said Capital Repair and that which Tenant
actually paid as its share of the cost of said Capital Repair. The determination of whether a replacement Office HVAC is required shall be made by the
Landlord; provided however, if Tenant disputes the Landlord's determination, then Landlord and Tenant shall each select, at its own cost and expense, an
independent Office HVAC contractor (or other specialist contractor handling the item of Capital Repair in question), as the case may be, to examine the
Office HVAC, or other Capital Repair item and determine whether a replacement Office HVAC or such other Capital Repair item as is in dispute, is required.
In the event the selected Office HVAC or other Capital Repair item contractor cannot reach a mutual conclusion, then they will select a third applicable
contractor, acceptable to all parties, who will examine the Office HVAC or other such Capital Repair item and render a report. In the event an independent
roofer or HVAC contractor cannot be so agreed upon, Office HVAC, or such other relevant Capital Repair contractor shall be selected by the American
Arbitration Association. The cost for such third Office HVAC or other relevant Capital Repair item contractor shall be borne equally by Landlord and Tenant.
(c) In case the Tenant shall fail or neglect at any time to make any of the repairs or replacements hereinabove agreed to be made by it
and shall continue such failure or neglect after thirty (30) days’ notice in writing thereof from the Landlord, unless the critical nature of the repair requires
immediate attention in which event the repair or replacement shall be made within twenty-four (24) hours after such written notice, then provided that (x)
Landlord has sent Tenant a reminder notice stating in BOLD AND CONSPICOUS LETTERS, that failure of Tenant to pay the make the requisite repairs or
replacements within five (5) business days after receipt of the reminder notice shall entitle Landlord to do so and to charge the Landlord’s actual out-of-
pocket cost therefor (without profit or mark-up) to Tenant, and (y) Tenant’s failure to pay make such repairs or replacements within said five (5) business day
period, then the Landlord or its agents, at the option of the Landlord, may enter the Demised Premises and make such repairs or replacements at the
reasonable cost and expense of Tenant (not to exceed Landlord’s actual out of pocket cost therefor without profit or markup) and Tenant shall pay same to
Landlord after receipt of a bill therefor (and reasonable substantiation of the charges included therein) as Additional Rent, concurrently with the next
installment of Monthly Basic Rent.
(d) The Tenant shall obtain and keep in full force and effect during the Term of this Lease, at its own cost and expense, a maintenance
contract on the heating, ventilation and air conditioning system servicing the office portion of the Building (but not the warehouse portion) and another
maintenance contract for the roof, both in form and content reasonably acceptable to Landlord. The roof maintenance contract shall with be with Centimark
Roofing, the installer of the new roof. Upon request, from time to time, Tenant shall provide Landlord with evidence that such contracts are in full force and
effect. For the avoidance of doubt, under no circumstances shall Tenant be required to maintain, repair or replace the HVAC units and systems servicing the
warehouse portion of the Building.
16
respect to the following:
Section 9.02. (A) The Tenant shall not, without the written consent of the Landlord, make any alterations, additions or improvements with
(a) the structure of the Building (which shall include, but not be limited to, footings, foundation walls, exterior bearing and non-
bearing walls, structural steel framework, floor slab, roofing, framework consisting of bar joists, girders and purlins, and load bearing interior masonry
partitions);
(b) mechanical, plumbing and electrical systems; and
(c) after the initial Tenant Work set forth on Exhibit C and Exhibit C-1 if applicable, any other alterations, additions or
improvements, the cost of which would exceed Twenty Thousand and 00/100 ($20,000.00) Dollars on an annual basis in the aggregate, excluding from the
annual aggregate all purely decorative alterations.
(d) Landlord’s prior consent shall not be required for purely decorative alterations. For purposes hereof, “decorations” means
cosmetic changes such as painting, hanging pictures, carpeting, furnishings, window treatments, wall hangings, wall coverings, floor coverings, readily
removable artwork and sculpture or fixtures, signage within the Premises, and other items of work that are of a primarily decorative, rather than construction
requiring governmental permits or approvals.
(B) If so requested by the Landlord, at the time consent is granted if so given, the Tenant will, except as otherwise provided in Section
4.06 of this Lease, remove all improvements made by it under this Lease prior to the expiration of the Term and leave the Demised Premises in such condition
as it was at the commencement of the Term of this Lease, reasonable wear and tear and damage by fire or other casualty, and condemnation excepted. Not less
than sixty (60) days prior to the expiration of the Term Landlord shall confirm which improvements and alterations made by Tenant, including those involving
the any reconfiguration or expansion of the office area by Tenant as indicated on Exhibit C-1 or by a supplemental writing at the time Landlord approved
Exhibit C-1, must be removed by Tenant. In the event the Tenant so fails to remove such improvements, then provided that (x) Landlord has sent Tenant a
reminder notice stating in BOLD AND CONSPICOUS LETTERS, that failure of Tenant to remove the improvements within thirty (30) days after receipt of
the reminder notice shall entitle Landlord to do so and to charge the Landlord’s actual out-of-pocket cost therefor (without profit or mark-up) to Tenant, and
(y) Tenant’s failure to perform such removal of improvements within said thirty (30) day period, then the Landlord may do so and collect from the Tenant, as
Additional Rent, its actual out of pocket costs and expenses of doing so without profit or markup. All erections, alterations, additions and improvements,
whether temporary or permanent in character, which may be made upon or to the Demised Premises either by the Landlord or the Tenant, except furniture or
movable trade fixtures installed at the expense of the Tenant, shall be the property of the Landlord and shall remain upon and be surrendered with the
Demised Premises as a part thereof at the termination of this Lease, without compensation to the Tenant unless Landlord indicates that removal is required at
the time it grants consent to such improvement if consent is required. For those erections, alterations, additions and improvements for which Landlord’s
consent is not required and for the improvements on Exhibit C-1 that are plans pertaining to Tenant’s Work enumerated on Exhibit C and which therefor need
not be removed at the end of the Term, if any, Tenant may request that Landlord inform Tenant, concurrently with Landlord’s grant of consent, whether the
work for which Tenant is seeking Landlord’s consent will require removal at the expiration or sooner termination of this Lease, and if Landlord notifies
Tenant that such work will not need to be removed, Landlord’s decision shall be binding upon Landlord. All furniture, movable trade fixtures and personalty
of the Tenant remaining in the Demised Premises after the expiration of the Term shall be deemed abandoned and may be removed by Landlord who may
collect from the Tenant, as Additional Rent, its actual, out-of-pocket costs and expenses, without profit or mark-up of so removing such property.
17
(c) of Section 9.02 above, require the following:
Section 9.03. The Landlord may, as a condition to granting its consent to any alteration, addition or improvement referred to in (a), (b) or
(a) Plans and Specifications therefor are first submitted to the Landlord;
(b) The Landlord shall approve such plans and specifications, the Landlord agreeing that, as to nonstructural repairs and alterations, its
approval will not be unreasonably withheld, delayed or conditioned;
governing body or agency having jurisdiction of building alterations, constructions and improvements; and
(c) Provided the Landlord has approved the same, the said Plans and Specifications are appropriately filed (if necessary) with the
(d) Consent (if necessary) is granted by that body for any of the said alterations, improvements, construction or repairs.
Section 9.04. Notwithstanding anything contained herein to the contrary, provided that Tenant furnishes Landlord with notice of the need
for such repairs as and when such need arises and further provided that such repairs are not required as a result of the acts or omissions of Tenant, its agents,
servants, employees or invitees, Landlord shall, throughout the Term, keep and maintain in good order, condition and repair, the structure of the Building
which shall mean the exterior load-bearing walls, foundation and structural steel framework (excluding the windows, glass, window frames, door frames, and
normal maintenance items including but not limited to caulking, pointing, painting and waterproofing, all of which shall be Tenant’s obligation, unless the
need therefor shall be due to the acts or omissions of Landlord or any Landlord Parties, in which case, Tenant shall perform the maintenance, repair or
replacement but at Landlord’s sole cost and expense, without profit-or-mark-up by Tenant). In the event that such repairs are required as a result of the acts or
omissions of Tenant, its agents, servants, employees or invitees, the Landlord shall nevertheless cause such repairs to be performed; however, Tenant shall,
upon demand, reimburse Landlord as Additional Rent for all actual out-of-pocket costs and expenses without profit or mark-up incurred by Landlord in
connection therewith.
18
ARTICLE X
Casualty
Section 10.01. If the Demised Premises or the Building is damaged or destroyed by fire, explosion, the elements or otherwise during the
Term so as to render the Demised Premises wholly untenantable or unfit for occupancy, or should the Demised Premises be so badly injured that the same
cannot be repaired within two hundred seventy (270) days from the happening of such injury, then, and in such case, the Term hereby created shall, at the
option of either the Landlord or the Tenant, terminate upon the giving of a notice of termination. If a notice of termination is given, the Term of this Lease
shall terminate effective as of the date of such damage or destruction, and the Tenant shall immediately surrender the Demised Premises and all the Tenant’s
interest therein to the Landlord, and pay Term Basic Rent and Additional Rent to the time of such damage or destruction, and the Landlord may re-enter and
repossess the Demised Premises discharged from this Lease and may remove all parties therefrom.
Section 10.02. Should the Demised Premises be rendered untenantable and unfit for occupancy, but yet be repairable within two hundred
seventy (270) days from the happening of said injury, the Landlord will, provided the mortgagee makes the proceeds of any casualty insurance required to be
carried pursuant to this Lease available to the Landlord to restore and further provided that the insurance proceeds so received are adequate to restore the
Building and the Demised Premises, enter and repair the same with reasonable speed, and the Term Basic Rent and Additional Rent shall abate until such time
as the Landlord makes such repairs so as to render the Demised Premises once again usable by the Tenant for the purposes under this Lease.
Section 10.03. If the Demised Premises shall be so slightly injured as not to be rendered untenantable and unfit for occupancy, the Landlord
shall repair the same with reasonable promptness and the Term Basic Rent and Additional Rent accrued and accruing shall not cease or terminate. The Tenant
shall immediately notify the Landlord in case of fire or other damage to the Demised Premises.
Section 10.04. Notwithstanding anything to the contrary in Section 10.01, neither the Landlord nor the Tenant shall have any option to
terminate this Lease upon the happening of an injury referred to in Section 10.01 provided (i) that the happening of such injury occurs at a time when the
unexpired Term of this Lease is two (2) years or more; (ii) further provided that the mortgagee makes the proceeds of any casualty insurance required to be
carried pursuant to this Lease available to Landlord to restore; and (iii) further provided that the insurance proceeds so received are adequate to restore the
Building and the Demised Premises. In such event, the Landlord shall repair the Demised Premises, even to the extent of rebuilding the Building if necessary,
subject, however, to the receipt of sufficient insurance proceeds. The Landlord shall promptly enter and repair the Demised Premises with reasonable speed,
making due allowance for conditions beyond the Landlord’s control, including, but not limited to time lost in adjusting insurance claims and strikes, and the
Term Basic Rent and Additional Rent shall abate until the earlier of such time as the Landlord makes such repairs so as to render the Demised Premises once
again usable by the Tenant for the purposes under this Lease. Landlord shall have no obligation to repair or restore Tenant’s improvements.
19
ARTICLE XI
Condemnation
Section 11.01. If, during the Term, twenty-five (25%) percent or more of the area of the Demised Premises shall be taken under any power
of eminent domain or condemnation then, at the option of the Tenant, to be exercised in writing within thirty (30) days of the taking of title thereto, this Lease
shall expire within thirty (30) days of the date of such notice and the Term Basic Rent and any Additional Rent herein reserved shall be apportioned as of said
date. However, if the Tenant does not exercise the aforementioned option, or if the taking does not deprive the Tenant of at least twenty-five (25%) percent of
the area of the Demised Premises, this Lease shall not expire but the Term Basic Rent and Additional Rent shall be equitably apportioned. If the Landlord and
the Tenant fail to agree upon an equitable apportionment, the Term Basic Rent and Additional Rent for the Building, after such taking, shall be determined in
accordance with the Commercial Rules of the American Arbitration Association, and the arbitrator shall be empowered to assess the costs and expenses of the
proceedings as part of the determination. Pending such determination the Tenant shall pay, on account of the Term Basic Rent and Additional Rent, such
proportion of the Term Basic Rent and Additional Rent reserved in this Lease as the total area of the Building after the taking bears to the total area of the
Building before the taking, subject to adjustment in accordance with the arbitrator’s award. No part of any award shall belong to the Tenant except that
nothing contained herein is intended to affect or limit the Tenant’s claim for fixtures or other improvements owned by Tenant provided the same does not
diminish the Landlord’s award. It is expressly understood and agreed that the provisions of this Article XI shall not be applicable to any condemnation or
taking for governmental occupancy for a limited period of time.
ARTICLE XII
Compliance With Laws, Etc.
Section 12.01. The Tenant shall not do or permit anything to be done in the Demised Premises which shall constitute a public nuisance or
which will conflict with the lawfully imposed regulations of the Fire Department or with any insurance policy which would cause an insurer to fail to insure
said improvements or any part thereof, subject to the limitations set forth in Section 12.02 hereof and elsewhere in this Lease.
20
Section 12.02. The Tenant shall, at its own expense, obtain all necessary environmental and operating permits and, except as otherwise set
forth herein, comply with all present and future requirements of law and with all present and future ordinances or orders, rules and regulations of federal and
any state, municipal or other public authority having jurisdiction over the Demised Premises and relating to Tenant’s business in the Demised Premises
(herein called “Legal Requirements”), and except as otherwise set forth in Section 12.01 above, with all requirements of the Fire Insurance Exchange or
similar body the non-compliance with which would prevent Landlord from obtaining insurance, and of any liability insurance company insuring the Landlord
against liability for accidents in or connected with the Demised Premises, the non-compliance with which would prevent Landlord from obtaining insurance.
Tenant shall not be in default hereunder for failure to comply with a Legal Requirement with respect to Tenant's business or method of doing business in the
Demised Premises unless such Legal Requirement also relates to the use or occupancy of real estate. This Article XII shall not impose on Tenant at any time
any obligation to undertake an obligation of Landlord herein, including, without limitation, any obligation to make any structural alterations required by any
Legal Requirement, or to make repairs or alterations to the Demised Premises, unless such repair or alteration is required as a result of Tenant's particular
method of doing business in the Demised Premises. Tenant, may at its sole cost and expense and after notice to Landlord by appropriate proceedings
prosecuted diligently and in good faith, contest any obligation imposed on Tenant pursuant to this Article and to defer compliance during the pendency of
such contest, provided that the failure of Tenant to so comply will not cause a lien against the Demised Premises unless Tenant is willing to and does bond
any such lien, or the risk of loss of the Demised Premises through sale, or cause any interference with the sale or financing of the Demised Premises, cause a
cancellation of Landlord’s insurance or subject Landlord to any fines, penalties or liability including prosecution for criminal liability or civil penalty, and
Tenant furnishes to Landlord security by way of cash, bond, or a letter of credit, reasonably satisfactory to Landlord, against any loss or injury by reason of
such contest or delay. Landlord shall cooperate with Tenant in such contest and shall execute any documents reasonably required in connection therewith at
no cost or expense to Landlord. Neither Landlord nor Tenant shall be in default under this Section 12.02 if the violation of a Legal Requirement is cured to
the satisfaction of the governmental authority that issued the violation.
Section 12.03. Each party shall deliver to the other, within ten (10) days after request therefor, any information relating to the Demised
Premises, or this Lease reasonably required by the other party in order to comply with Legal Requirements.
Section 12.04.
(a) Definitions. For the purposes of this Article XII, the following terms shall have the meanings set forth below.
(i) “Environment” shall mean ambient air, surface water, groundwater, soil, sediment or land.
Environment.
(ii) “Environmental Conditions” shall mean any pollution or contamination of, or the Release of Hazardous Materials into the
(iii) “Environmental Laws” shall mean all federal, state and local laws, ordinances, rules, regulations and legally enforceable
policies, now existing or hereafter amended, enacted or promulgated, regarding the environment, health or safety, or Hazardous Materials, which apply to the
Demised Premises or its use, including without limitation the Federal Water Pollution Control Act, 33 U.S.C. §§ 1231-1387; the Resource Conservation and
Recovery Act, 42 U.S.C. §§ 6901-6991; the Clean Air Act, 42 U.S.C. §§7401-7642; the Comprehensive Environmental Response Compensation and
Liability Act, 42 U.S.C. §§ 9601-9675 (“CERCLA”); the Toxic Substances Control Act, 15 U.S.C. §§ 2601-2629; the New Jersey Spill Compensation and
Control Act, N.J.S.A. 58:10-23.11 et seq. (“Spill Act”); the New Jersey Water Pollution Control Act, N.J.S.A. 58:10A-1 et seq.; the New Jersey Solid Waste
Management Act, N.J.S.A. 13:1E-1 et seq.; the New Jersey Industrial Site Recovery Act, N.J.S.A. 13:1K-6 et seq. (“ISRA”); the New Jersey Underground
Storage of Hazardous Substances Act, N.J.S.A. 58:10A-21 et seq.; the Site Remediation Reform Act, N.J.S.A. 58:10C-1 et seq. (the “SRRA”); and the
Brownfield and Contaminated Site Remediation Act, N.J.S.A. 58:10B-1 et seq.; and the rules and regulations promulgated thereunder.
21
of those terms are defined in any Environmental Laws, and any substance the presence of which may result in liability under common law.
(iv) “Hazardous Materials” shall mean any hazardous substance, hazardous waste, toxic substance, pollutant or contaminant as any
emptying, injection, disposal or dumping into the Environment.
(v) “Release” shall mean any intentional or unintentional release, discharge, burial, spill, leaking, pumping, pouring, emitting,
(vi) “Remediation Standards” means either numeric or narrative standards to which Hazardous Materials in the Environment must
be remediated as established pursuant to Environmental Laws.
(b) Landlord’s Representation and Warranties.
require remediation pursuant to Environmental Laws.
(i) To Landlord’s knowledge there are no Environmental Conditions on, at, under or emanating from the Demised Premises which
asserted, issued or commenced pursuant to any Environmental Laws against Landlord or the Demised Premises.
(ii) Landlord has not received notice of any pending or threatened claims, actions, investigations or proceedings of any kind
(iii) Landlord does not have in its possession, custody or control any reports and audits, summaries, proposals, recommendations,
work plans and field and laboratory data relating or referring to environmental matters respecting the Demised Premises, including any Environmental
Conditions on, at, under or emanating from the Demised Premises.
(iv) Except for the ISRA compliance proceedings respecting Indopco Incorporated (Case No. E97238) and Permabond International
(Case No. E2000007), which to Landlord’s knowledge were completed in compliance with the requirements of ISRA, there have been no site remediation
proceedings conducted under or pursuant to Environmental Laws at or with respect to the Demised Premises.
Section 12.05. Tenant’s Covenants.
(a) Except as specifically set forth in this Section 12.05, and subject to the limitations set forth in Section 12.02, Tenant shall conduct its
operations at, and maintain, the Demised Premises in compliance with all applicable Environmental Laws.
(b) Tenant hereby represents that the North American Industry Classification System (hereinafter “NAICS”) code that best describes
Tenant’s operations at the Demised Premises, which shall consist of the operations described in Section 5.01 hereof, is 423430, as determined by reference to
the NAICS codes dated and published in 2002 by the Executive Office of the President of the United States, Office of Management and Budget, ISBN 0-
934213-87-9 NTIS PB2002-502024, which NAICS code is not subject to ISRA. Tenant shall not conduct operations at the Demised Premises which would
cause the Demised Premised to be an “industrial establishment” pursuant to ISRA.
22
(c) During the Term, Tenant shall not cause, or permit any of its employees, contractors, invitees or licensees (the “Tenant Parties”) to
cause, a Release of Hazardous Materials on, at or under the Demised Premises (a “Tenant Release”). In the event of a Tenant Release, Tenant shall retain a
Licensed Site Remediation Professional reasonably satisfactory to Landlord and conduct at its own cost and expense, the investigation or remediation of such
Tenant Release in accordance with the requirements of applicable Environmental Laws and consistent with the non-residential use of the Demised Premises,
including Remediation Standards applicable to non-residential uses and properties, the preparation of all required reports and forms including, without
limitation, the preparation of a Remedial Action Workplan (if required), and the submission of all required Remediation Funding Sources (as such term is
defined in the SRRA), provided Tenant shall not propose or implement any engineering control or institutional control at the Demised Premises without
Landlord’s consent, which consent shall not be unreasonably withheld, delayed or conditioned. In the event that Landlord shall approve any engineering
control or institutional control, Tenant shall be responsible, but only during the Term and prior to the expiration or earlier termination of this Lease, to comply
at Tenant’s sole cost and expense with the conditions of same, including, without limitation by complying with any “remedial action permit”; provided,
however, that, at the expiration or earlier termination of the Term, Tenant shall (i) pay to Landlord the amount of any financial assurance required under such
remedial action permit and Landlord shall use such funds to post new financial assurance to replace the financial assurance posted by Tenant, and (ii) Tenant
shall reimburse Landlord within fifteen (15) days of Tenant’s receipt of a bill (and reasonable documentation requested by Tenant) for out-of-pocket costs and
expenses reasonably incurred by Landlord to comply with the requirements of such engineering and/or institutional controls and such remedial action permit,
which obligation of Landlord and Tenant shall survive the termination of the Lease until such time as such controls or permits are no longer required at the
Premises by any Governmental Authority. Tenant shall have no obligation to pay for, address, investigate or remediate, and Landlord shall be solely
responsible at its cost and expense to address, investigate and remediate (i) any Release of Hazardous Materials that is not a Tenant Release, including any
Release that is caused by Landlord, or (ii) any Environmental Conditions on, at, under or emanating from the Demised Premises occurring or existing on or
before the Commencement Date (collectively, the “Existing Conditions”). Without in any way limiting the generality of the foregoing, in the event
remediation shall be required, Tenant shall be responsible for all costs of investigation and remediation related to a Tenant Release and Landlord shall be
responsible for all costs of investigation and remediation related to the Existing Conditions and shall conduct such investigations and remediation at such
times, in such manner and with such advance notice to Tenant so as not to unreasonable interfere with Tenant’s use of or operations at the Demised Premises.
(d) At no expense to Landlord, Tenant shall promptly provide all information reasonably requested by Landlord or any Governmental
Authority regarding Tenant’s compliance with applicable Environmental Laws or Tenant’s satisfaction of its obligations under this Section 12.05, and, at no
expense to Tenant, Landlord shall promptly provide all information reasonably requested by Tenant or any Governmental Authority regarding Landlord’s
compliance with applicable Environmental Laws or Landlord’s compliance with its obligations under this Section 12.05. Consistent with the foregoing
sentence, Landlord and Tenant shall sign any certification or affidavit concerning compliance with Environmental Laws submitted to it by the other which is
true, accurate and complete and reasonably acceptable to such party’s counsel; if a certification or affidavit is not true, accurate and complete, such party shall
provide the necessary information to make it true, accurate or complete and shall then sign same.
23
(e) Tenant shall within two (2) business days’ supply Landlord with copies of any notices, correspondence and submissions made by
Tenant to, or received by Tenant from, the NJDEP, the USEPA or any other Governmental Authority concerning Tenant’s compliance with Environmental
Laws. Tenant shall provide Landlord with any report, workplan or proposal for the performance of investigatory or remedial actions which Tenant intends to
submit to any governmental authority no less than five (5) days prior to such submission.
underground or above ground tanks or vessels for the storage of Hazardous Materials on the Demised Premises.
(f) Tenant shall not install any Underground Storage Tanks, as that term is defined in any Environmental Laws, or any other
(g) At any time upon the reasonable request of the Landlord, and after providing reasonable prior notice, Tenant shall give Landlord and
its representatives access to the Demised Premises during normal business hours, accompanied by a representative of Tenant, in order to inspect the Demised
Premises, inspect any documents pertaining to Tenant’s compliance with Environmental Laws, or perform any similar evaluations in order to determine that
the Demised Premises or its use by Tenant complies with Environmental Laws.
(h) If at the time of the expiration or earlier termination of this Lease, there exists a violation of, or failure to comply with,
Environmental Laws at the Demised for which Tenant is responsible under Environmental Laws and this Lease, or if Tenant has failed to fulfill its obligations
under this Section 12.05, and Landlord, despite commercially reasonable efforts, is unable to rent the entire Demised Premises as a result thereof, then
Landlord shall provide Tenant with a thirty (30) day period within which to cure such violation or satisfy such obligation and, if Tenant has not cured such
violation or satisfied such obligation within such thirty (30) day period and Landlord is still, despite its commercially reasonable efforts, prevented from
renting the Demised Premises as a result thereof, Landlord shall have the right to treat Tenant as a “holdover tenant” pursuant to Section 17.01 hereof at a
Monthly Basic Rent at the rate required under Section 17.01 until the earlier of such time as Tenant has cured such violation or satisfied such obligation or
Landlord is otherwise able to rent the Demised Premises. During such period, Tenant shall have access to the Demised Premises to perform the work
necessary to cure the violation or satisfy the obligation subject to the indemnification and insurance requirements under this Lease.
(i) In the event that a lien shall be filed pursuant to Environmental Laws (including the Spill Act or CERCLA) against the Demised
Premises during the Term resulting from a Tenant Release, then Tenant shall, within thirty (30) days from the time Tenant is given notice of the lien, or within
such shorter period of time in the event that the United States, New Jersey, or any Governmental Authority has commenced steps to cause the Demised
Premises to be sold pursuant to the lien, pay or bond the claim and remove the lien from the Demised Premises.
24
Section 12.06. Indemnification.
(j) By Tenant. Tenant shall indemnify, defend and hold Landlord and its managing agent harmless from and against all fines, suits,
procedures, claims, liabilities, costs (including sampling, monitoring and remediation costs, attorneys’, consultants’ and engineering fees and disbursements,
costs of defense and interest), actions of any kind and compensatory damages (including damages on account of personal injury or death, property damage or
damage to natural resources) (collectively, “Losses”) imposed on, incurred by or asserted against Landlord or for which Landlord may be liable or obligated,
arising out of or in any way connected with (i) any Tenant Releases, or (ii) Tenant’s failure to comply with the provisions of Section 12.05 hereof. Tenant’s
obligations under this Section 12.06(a) shall be subject to the following conditions: (1) Landlord promptly notifies Tenant in writing of any claim or Losses
and fully cooperates with Tenant (at no cost to Landlord) in the defense of such claim or the disposition of such Losses; (2) Tenant shall have sole control of
such defense and all negotiations for any settlement; and (3) Landlord shall refrain from admitting liability or otherwise compromising the claim in whole or
in part without the express prior written permission of Tenant. Losses shall not include any indirect, consequential, inferred, presumed, special, incidental, or
exemplary, punitive or “stinging,” damages, or any of the like, of any kind or nature, no matter how denominated, titled or labeled, whether foreseen or
unforeseen, including, without limitation, damages for loss of revenue or loss of profits
(k) By Landlord. Landlord shall indemnify, defend and hold Tenant and the Tenant Parties harmless from and against all Losses
imposed on, incurred by or asserted against Tenant or any of the Tenant Parties or for which Tenant or any of the Tenant Parties may be liable or obligated,
arising out of or in any way connected with (i) any Existing Conditions, (ii) any violations of or non-compliance with Environmental Laws applicable to the
Demised Premises by Landlord during the Term, (iii) Landlord’s failure to satisfy any of its obligations under Section 12.05 hereof; or (iv) Landlord’s breach
of any of its representations and warranties set forth in Section 12.04(b) hereof. Landlord’s obligations under this Section 12.06(b) shall be subject to the
following conditions: (1) Tenant promptly notifies Landlord in writing of any claim or Losses and fully cooperates with Landlord (at no cost to Tenant) in the
defense of such claim or the disposition of such Losses; (2) Landlord shall have sole control of such defense and all negotiations for any settlement; and (3)
Tenant shall refrain from admitting liability or otherwise compromising the claim in whole or in part without the express prior written permission of
Landlord.
Section 12.07. Survival. The respective obligations of Tenant and Landlord under Sections 12.05 and 12.06 hereof, shall survive the
expiration or earlier termination of this Lease.
25
ARTICLE XIII
Subordination/Estoppels
Section 13.01. Landlord represents that there are no mortgages currently encumbering the Demised Premises. This Lease shall be subject
and subordinate to all future institutional first mortgages affecting the Demised Premises, provided that any such first mortgagee shall provide a
subordination, non-disturbance and attornment agreement (“SNDA”) that will provide that in the event of a foreclosure of such mortgage, the mortgagee
and/or subsequent purchaser shall honor all of Tenant’s rights under this Lease, including without limitation, any free rent periods and renewal rights and not
disturb the Tenant’s possession of the Demised Premises so long as the Tenant is not in default under any provision of this Lease after receipt of notice thereof
and the expiration of all applicable cure periods set forth herein. The Tenant shall execute any reasonable instrument which may be deemed necessary or
desirable by the mortgagee and/or Landlord to further evidence the subordination of this Lease to any such first mortgage. An institutional first mortgage shall
be construed to be one in favor of a pension trust fund, insurance company, bank or other institutional lender. The Landlord may assign this Lease to any such
mortgagee in connection with any mortgage lien superior to this Lease, and the Tenant shall execute any reasonable instrument which may be necessary or
desirable by the Landlord or the mortgagee in connection with said assignment. Any expense incurred in the preparing or recording of such assignment or
subordination to any mortgagee shall be without expense or cost to the Tenant.
Section 13.02. The Tenant further agrees, within ten (10) days of Landlord’s written request, to certify by written instrument duly executed
and acknowledged to any institutional first mortgagee or purchaser, or any proposed institutional first mortgage lender or purchaser, that this Lease is in full
force and effect, or if not, in what respect it is not, that this Lease has not been modified, or the extent to which it has been modified, that there are no existing
defaults hereunder to the best of the knowledge of the party so certifying, or specifying the defaults, if any, and any other information which Landlord shall
reasonably require. Any such certification shall be without prejudice as between the Landlord and the Tenant, it being agreed that any document required
hereunder shall not be used in any litigation between the Landlord and the Tenant. Upon Tenant’s request, Landlord shall deliver an estoppel certificate to
Tenant certifying the foregoing, mutatis mutandis.
ARTICLE XIV
Defaults, Remedies
hereinafter called an Event of Default) shall happen:
Section 14.01. If, during the Term, any one or more of the following acts or occurrences (any one of such occurrences or acts being
(A) The Tenant shall default in making any payment of Term Basic Rent or any regularly recurring Additional Rent as and when the same
shall become due and payable, and such default shall continue for a period of ten (10) days after notice from the Landlord that such payment is due and
unpaid; or
(B) The Tenant shall default in the performance of or compliance with any of the other covenants, agreements, terms or conditions of this
Lease to be performed by the Tenant (other than any default curable by payment of money), and such default shall continue for a period of twenty (20) days
after written notice thereof from the Landlord to the Tenant, or, in the case of a default which cannot with due diligence be cured within twenty (20) days, the
Tenant shall fail to proceed promptly (except for unavoidable delays) after the giving of such notice and with all due diligence to cure such default and
thereafter to prosecute the curing hereof with all due diligence (it being intended that as to a default not susceptible of being cured with due diligence within
twenty (20) days, the time within which such default may be cured shall be extended for such period as may be reasonably necessary to permit the same to be
cured with all due diligence); or
26
(C) The Tenant shall file a voluntary petition in bankruptcy or shall be adjudicated a bankrupt or insolvent, or shall file any petition or
answer seeking any reorganization, composition, readjustment or similar relief under any present or future bankruptcy or other applicable law, or shall seek or
consent to or acquiesce in the appointment of any trustee, receiver, or liquidator of the Tenant or of all or any substantial part of its properties or of all or any
part of the Demised Premises; or
(D) If, within sixty (60) days after the filing of an involuntary petition in bankruptcy against the Tenant or the commencement of any
proceeding against the Tenant seeking any reorganization, composition, readjustment or similar relief under any law, such proceeding shall not have been
dismissed, or if, within sixty (60) days after the appointment, without the consent or acquiescence of the Tenant of any trustee, receiver or liquidator of the
Tenant or of all or any part of the Demised Premises, such appointment shall not have been vacated or stayed on appeal or otherwise, or if, within sixty (60)
days after the expiration of any such stay, such appointment shall have been vacated, or if, within sixty (60) days after the taking possession, without the
consent or acquiescence of the Tenant or such guarantor, of the property of the Tenant, by any governmental office or agency pursuant to statutory authority
for the dissolution or liquidation of the Tenant, such taking shall not have been vacated or stayed on appeal or otherwise; or
(E) If the Demised Premises shall be abandoned by the Tenant for a period of thirty (30) consecutive days.
then, and in any such event, and during the continuance thereof, the Landlord may, at its option, then or thereafter while any such Event of Default
shall continue and notwithstanding the fact that the Landlord may have any other remedy hereunder or at law or in equity, by notice to the Tenant, designate a
date, not less than ten (10) days after the giving of such notice, on which this Lease shall terminate; and thereupon, on such date the Term of this Lease and
the estate hereby granted shall expire and terminate upon the date specified in such notice with the same force and effect as if the date specified in such notice
was the date hereinbefore fixed for the expiration of the Term of this Lease, and all rights of the Tenant hereunder shall expire and terminate, but the Tenant
shall remain liable as hereinafter provided. Additionally, Tenant agrees to pay, as Additional Rent, all reasonable attorney’s fees and other expenses incurred
by the Landlord in enforcing any of the obligations under this Lease, this covenant to survive the expiration or sooner termination of this Lease.
Section 14.02. If this Lease is terminated as provided in Section 14.01, or as permitted by law, the Tenant shall peaceably quit and surrender
the Demised Premises to the Landlord, and the Landlord may, without further notice, enter upon, re-enter, possess and repossess the same by summary
proceedings, ejectment or other legal proceedings, and again have, repossess and enjoy the same as if this Lease had not been made, and in any such event
neither the Tenant nor any person claiming through or under the Tenant by virtue of any law or an order of any court shall be entitled to possession or to
remain in possession of the Demised Premises, and the Landlord, at its option, shall forthwith, notwithstanding any other provision of this Lease, be entitled
to recover from the Tenant (in lieu of all other claims for damages on account of such termination) as and for liquidated damages an amount equal to the
excess of all Term Basic Rent and Additional Rent reserved hereunder for the unexpired portion of the Term of this Lease discounted at the rate of six (6%)
percent per annum to the then present worth, over the fair rental value of the Demised Premises at the time of termination for such unexpired portion of the
Term. Nothing herein contained shall limit or prejudice the right of the Landlord, in any bankruptcy or reorganization or insolvency proceeding, to prove for
and obtain as liquidated damages by reason of such termination an amount equal to the maximum allowed by any bankruptcy or reorganization or insolvency
proceedings, or to prove for and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule
of law whether such amount shall be greater or less than the excess referred to above.
27
Section 14.03. If the Landlord re-enters and obtains possession of the Demised Premises, as provided in Section 14.02 of this Lease,
following an Event of Default, the Landlord shall have the right, without notice, to repair or alter the Demised Premises in such manner as the Landlord may
deem necessary or advisable so as to put the Demised Premises in good order and to make the same rentable, and shall have the right, at the Landlord’s
option, to relet the Demised Premises or a part thereof, and the Tenant shall pay to the Landlord on demand all reasonable expenses incurred by the Landlord
in obtaining possession, and in altering, repairing and putting the Demised Premises in good order and condition and in reletting the same, including
reasonable fees of attorneys and architects, and all other reasonable expenses or commissions, and the Tenant shall pay to the Landlord upon the rent payment
dates following the date of such re-entry and including the date for the expiration of the Term of this Lease in effect immediately prior to such re-entry, the
sums of money which would have been payable by the Tenant as Term Basic Rent and Additional Rent hereunder on such rent payment dates if the Landlord
had not re-entered and resumed possession of the Demised Premises, deducting only the net amount of Term Basic Rent and Additional Rent, if any, which
the Landlord shall actually receive (after deducting from the gross receipts the expenses, costs and payments of the Landlord which in accordance with the
terms of this Lease would have been borne by the Tenant) in the meantime from and by any reletting of the Demised Premises, and the Tenant shall remain
liable for all sums otherwise payable by the Tenant under this Lease, including but not limited to the expense of the Landlord aforesaid, as well as for any
deficiency aforesaid, and the Landlord shall have the right from time to time to begin and maintain successive actions or other legal proceedings against the
Tenant for the recovery of such deficiency, expenses or damages or for a sum equal to any Term Basic Rent payment and Additional Rent. Notwithstanding
anything to the contrary in this Lease, Landlord shall use its commercially reasonable efforts to minimize its damages in the event of any Event of Default by
Tenant. As an alternative remedy, the Landlord shall be entitled to damages against the Tenant for breach of this Lease, at any time (whether or not the
Landlord shall have become entitled to or shall have received any damages as hereinabove provided) in an amount equal to the excess, if any, of the Term
Basic Rent and Additional Rent which would be payable under this Lease at the date of the expiration of the Term, less the amount of Term Basic Rent and
Additional Rent received by the Landlord upon any reletting, both discounted to present worth at the rate of six (6%) percent per annum. The obligation and
liability of the Tenant to pay the Term Basic Rent and the Additional Rent shall survive the commencement, prosecution and termination of any action to
secure possession of the Demised Premises. Nothing herein contained shall be deemed to require the Landlord to wait to begin such action or other legal
proceedings until the date when this Lease would have expired had there not been an Event of Default.
28
Section 14.04. The Tenant hereby waives all right of redemption to which the Tenant or any person under it may be entitled by any law now
or hereafter in force. In addition, in the case of an Event of Default which results in the Landlord recovering possession of the Demised Premises, Landlord
will use reasonable efforts to mitigate its damages as provided for in this Article XIV, provided that Landlord shall retain the right, in the exercise of its
reasonable business judgment, to approve any tenant and determine the reasonable terms and conditions of any lease, including, but not limited to, rent and
length of term. Notwithstanding the foregoing, Landlord shall not be obligated to display the Demised Premises to prospective tenants if Landlord or its
affiliates has other premises available in the immediate area. However, if prospective tenants do not find such other premises suitable, Landlord agrees that it
will then display the Demised Premises to the prospective tenants. The Landlord’s remedies hereunder are in addition to any remedy allowed by law.
Section 14.05. In the event of any breach or threatened breach by Tenant of any of the agreements, terms, covenants or conditions contained
in this Lease, Landlord shall be entitled to enjoin such breach and shall have the right to invoke any right or remedy allowed at law or in equity or by statute
or otherwise as though re entry, summary dispossess proceedings, and other remedies were not provided for in this Lease. During the pendency of any
proceedings brought by Landlord to recover possession by reason of default, Tenant shall continue all money payments required to be made to Landlord, and
Landlord may accept such payments for use and occupancy of the Demised Premises. In such event, Tenant waives its right in such proceedings to claim as a
defense that the receipt of such money payments by Landlord constitutes a waiver by Landlord of such default.
Section 14.06. If Tenant fails, on three (3) separate occasions in any twelve (12) consecutive month period during the Term hereof, to make
payment of the Monthly Basic Rent and/or any regularly recurring Additional Rent on or before the expiration of the due date therefor, or within ten (10) days
of receipt of notice that same was not received, then, whether or not Tenant ultimately makes and Landlord accepts the required payment thereafter, Landlord
shall have the right to accelerate Tenant’s payment of all Monthly Basic Rent and any regularly recurring Additional Rent for the balance of the then current
Lease Year, and within ten (10) business days after receipt of notice of Landlord’s election to do so, Tenant shall pay to Landlord all such Monthly Basic Rent
and regularly recurring Additional Rent due for the balance of the then current Lease Year. For the purpose of calculating the twelve (12) month period
referred to in the first sentence of this Section 14.06 following Tenant’s payment of the accelerated Rent as set forth in the previous sentence, the new twelve
(12) month period shall begin on the first day of the first month of the next Lease Year.
29
ARTICLE XV
Assignment and Sublease
the Demised Premises in any manner except as specifically provided for in this Article XV.
Section 15.01. (A) The Tenant may not mortgage, pledge, hypothecate, assign, transfer, sublet, license or otherwise deal with this Lease or
(B) Tenant shall have the right to assign this Lease or underlet the whole or any part of the Demised Premises for a use permitted
hereunder, but only with the written consent of the Landlord first had and obtained, which consent shall not be unreasonably withheld or delayed, on the basis
of the following terms and conditions:
(1) A copy of the sublease or a signed final term sheet shall be furnished to the Landlord which, in the case of an
assignment shall provide that said assignee assumes all of the obligations of this Lease. Any sublease shall expressly
acknowledge that said subtenant’s rights against the Landlord shall be no greater than those of Tenant.
(2) The Tenant shall be and remain liable for the observance of all of the covenants and provisions of this Lease,
including but not limited to the payment of the Term Basic Rent reserved herein, through the entire Term of this Lease, as the
same may be renewed, extended or otherwise modified, but Tenant shall not be liable for any increase in obligations or decrease
in rights to which modification, extension or otherwise Tenant did not consent to in writing.
(3) The Tenant shall promptly pay to the Landlord one half (1/2) of the net consideration received for any assignment
or one-half (1/2) of the net rent (Basic and Additional), and one-half (1/2) of any other net consideration payable by the subtenant
to Tenant under or in connection with the sublease (including, but not limited to, sums paid for the sale or rental of Tenant’s
fixtures, leasehold improvements, equipment, furniture, or other personal property), as and when received in excess of the Basic
Rent and Additional Rent required to be paid by Tenant for the area sublet, computed on the basis of an average square foot rent
for the gross square footage tenant has leased. As used herein, “net consideration” and/or “net rent” shall mean gross rent Basic
and Additional) or gross consideration for an assignment less any reasonable brokerage or tenant improvement work paid by
tenant in connection with the assignment or sublet, said brokerage or tenant work to be amortized over the term of the assignment
or sublet. This subparagraph shall not apply to a transfer as described in subsection (J) below.
(C) In any event, the acceptance by the Landlord of any rent from the assignee or from any of the subtenants, or the failure of the
Landlord to insist upon a strict performance of any of the terms, conditions and covenants herein shall not release the Tenant herein from any and all of the
obligations herein during and for the entire Term of this Lease.
(D) The Landlord shall require a One Thousand and 00/100 ($1,000.00) Dollar payment to cover its handling charges for each request for
consent to any assignment or sublet prior to its consideration of the same. The Tenant acknowledges that its sole remedy with respect to any assertion that the
Landlord’s failure to consent to any assignment or sublet is unreasonable shall be the remedy of specific performance, and the Tenant shall have no other
claim or cause of action against the Landlord as a result of the Landlord’s actions in refusing to consent thereto.
30
(E) In the event that any or all of Tenant’s interest in the Demised Premises and/or this Lease is transferred by operation of law to any
trustee, receiver, or other representative or agent of Tenant, or to Tenant as a debtor in possession, and subsequently any or all of Tenant’s interest in the
Demised Premises and/or this Lease is offered or to be offered by Tenant or any trustee, receiver, or other representative or agent of Tenant as to its estate or
property (such person, firm or entity being hereinafter referred to as the “Grantor”), for assignment, conveyance, lease, or other disposition to a person, firm
or entity other than Landlord (each such transaction being hereinafter referred to as a “Disposition”), it is agreed that Landlord has and shall have a right of
first refusal to purchase, take, or otherwise acquire, the same upon the same terms and conditions as the Grantor thereof shall accept upon such Disposition to
such other person, firm, or entity; and as to each such Disposition the Grantor shall give written notice to Landlord in reasonable detail of all of the terms and
conditions of such Disposition within twenty (20) days next following its determination to accept the same but prior to accepting the same, and Grantor shall
not make the Disposition until and unless Landlord has failed or refused to accept such right of first refusal as to the Disposition, as set forth herein.
Landlord shall have sixty (60) days next following its receipt of the written notice as to such Disposition in which to exercise the option to acquire
Tenant’s interest by such Disposition, and the exercise of the option by Landlord shall be effected by notice to that effect sent to the Grantor; but nothing
herein shall require Landlord to accept a particular Disposition or any Disposition, nor does the rejection of any one such offer of first refusal constitute a
waiver or release of the obligation of the Grantor to submit other offers hereunder to Landlord. In the event Landlord accepts such offer of first refusal, the
transaction shall be consummated pursuant to the terms and conditions of the Disposition described in the notice to Landlord. In the event Landlord rejects
such offer of first refusal, Grantor may consummate the Disposition with such other person, firm, or entity; but any decrease in price of more than two (2%)
percent of the price sought from Landlord or any change in the terms of payment for such Disposition shall constitute a new transaction requiring a further
option of first refusal to be given to Landlord hereunder.
(F) Without limiting any of the provisions of Article XIV, if pursuant to the Federal Bankruptcy Code (or any similar law hereafter
enacted having the same general purpose), Tenant is permitted to assign this Lease, notwithstanding the restrictions contained in this Lease, adequate
assurance of future performance by an assignee expressly permitted under such Code shall be deemed to mean the deposit of cash security in an amount equal
to the sum of one (1) year’s Annual Basic Rent and Additional Rent for the next succeeding twelve (12) months (which Additional Rent shall be reasonably
estimated by Landlord), which deposit shall be held by Landlord for the balance of the Term, without interest, as security for the full performance of all of
Tenant’s obligations under this Lease, to be held and applied in the manner specified for security in Section 22.02.
(G) Intentionally omitted.
(H) Except as specifically set forth above, or in (I) or (J) below no portion of the Demised Premises or of Tenant’s interest in this Lease
may be acquired by any other person or entity, whether by assignment, mortgage, sublease, transfer, operation of law or act of the Tenant, nor shall Tenant
pledge its interest in this Lease or in any security deposit required hereunder.
31
(I) If Tenant is a corporation other than a corporation whose stock is listed and traded on a nationally or internationally recognized stock
exchange, and except as otherwise permitted by Section 15.01 (J) below, the provisions of this Subsection 15.01(I) shall apply to a transfer (however
accomplished, whether in a single transaction or in a series of related or unrelated transactions) of stock [or any other mechanism such as, by way of example,
the issuance of additional stock, a stock voting agreement or change in class(es) of stock] which results in a change of control of Tenant as if such transfer of
stock (or other mechanism) which results in a change of control of Tenant were an assignment of this Lease, and if Tenant is a partnership or joint venture,
said provisions shall apply with respect to a transfer (by one or more transfers) of an interest in the distributions of profits and losses of such partnership or
joint venture (or other mechanism, such as, by way of example, the creation of additional general partnership or limited partnership interests) which results in
a change of control of such a partnership or joint venture as if such transfer of an interest in the distributions of profits and losses of such partnership or joint
venture which results in a change of control of such partnership or joint venture were an assignment of this Lease however this provision shall not apply to the
addition of partners, or reformulation on retirement or death of partners and said provisions shall not apply to transactions with a corporation into or with
which Tenant is merged or consolidated or to which all or substantially all of Tenant’s assets are transferred or to any corporation which controls or is
controlled by Tenant or is under common control with Tenant, provided that in the event of such merger, consolidation or transfer of all or substantially all of
Tenant’s assets, (i) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the greater
of (a) the net worth of Tenant immediately prior to such merger, consolidation or transfer or (b) the net worth of Tenant herein named on the date of this
Lease, and (ii) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of any
such transaction.
(J) Notwithstanding anything contained in this Article XV, upon at least thirty (30) days prior written notice but without having to obtain
Landlord’s prior written approval the Tenant may assign or sublet the whole or any part of the Demised Premises to (i) an affiliated entity,(ii) to any entity
with which it shall be merged, or (ii) to an entity that acquires all of the assets of the Tenant, provided Tenant first supplies Landlord with all written evidence
necessary to satisfy Landlord of the relationship between Tenant and the transferee and further provided that in each instance above, Tenant shall remain
liable hereunder.. As used herein, “affiliated corporation” with respect to Tenant shall mean any corporation related to Tenant as a parent, subsidiary or
brother-sister corporation so that such corporation and Tenant and other corporations constitute a controlled group as determined under Section 1563 of the
Internal Revenue Code of 1986, as amended and as elaborated by the Treasury Regulations promulgated thereunder.
(K) In the event of an assignment, sublet or other transfer under this Article, the Demised Premises may be used only for the Permitted
Use.
32
ARTICLE XVI
Notices
Section 16.01.Any notice by either party to the other shall be in writing and shall be deemed to have been duly given only if (a) delivered
personally or (b) sent by registered mail or certified mail, return receipt requested, in a postpaid envelope or (c) sent by regionally or nationally recognized
overnight courier service (“Overnight Courier”) such as Federal Express, addressed at the address set forth below, or at such other address as it shall
designate by notice, as follows:
If to Landlord:
with copy to:
If to Tenant:
with copy to:
Bonanno Real Estate Group I, L.P.
c/o Tryon Management
107 West Tryon Avenue
Teaneck, New Jersey 07666
Cole Schotz P.C.
Court Plaza North
25 Main Street
Hackensack, New Jersey 07601
Attention: Mitchell W. Abrahams, Esq.
Kornit Digital North America, Inc.
480 South Dean Street
Englewood, New Jersey 07631
Kornit Digital Ltd.
12 Ha’Amal St., Rosh Ha’Ayin Israel
Attention: General Counsel
Any notice so sent shall be deemed given upon its receipt or rejection as evidenced by a bill of lading or return receipt or upon delivery if personally
served.
ARTICLE XVII
Holding Over
Section 17.01. If the Tenant shall remain in the Demised Premises after the expiration of the Term without having executed and delivered a
new lease with the Landlord, such holding over shall not constitute a renewal or extension of this Lease. The Landlord may, at its option, elect to treat the
Tenant as one who has not removed at the end of its Term, and thereupon be entitled to all the remedies against the Tenant provided by law in that situation, or
the Landlord may elect, at its option, to construe such holding over as a tenancy from month to month, subject to all the terms and conditions of this Lease,
except as to the duration thereof, and in that event the Tenant shall in additional to all Additional Rent pay installments of Monthly Basic Rent at one hundred
fifty percent (150%) of the rate paid for the month immediately preceding the expiration of the Lease for the first thirty (30) days, then commencing on the
thirty first (31st) day following the expiration of the Lease Term, at one hundred seventy-five percent (175%) of the rate paid for the month immediately
preceding the expiration of the Lease for the next thirty (30) days, and thereafter, commencing on the sixty first (61st) day following the expiration of the
Lease Term, at two hundred percent (200%) of the rate of Monthly Basic Rent paid immediately preceding the expiration of the Lease Term, but in no event
less than the rate provided herein for the last month of the Term.
33
ARTICLE XVIII
Liens
Section 18.01. In the event that any mechanic’s lien is filed against the Demised Premises as a result of alterations, additions or
improvements made by the Tenant and not discharged by payment or bonding within twenty (20) days after notice by the Landlord to the Tenant, Landlord
may treat such failure as an Event of Default under Section 14.01(B). In addition, after twenty (20) days’ written notice to the Tenant, the Landlord, at its
option, may pay and discharge such lien, without inquiring into the validity thereof, and the Tenant shall, on demand of the Landlord, reimburse the Landlord
as Additional Rent hereunder for the total expense incurred by the Landlord in discharging such lien.
ARTICLE XIX
Condition of Demised Premises, Loss, Etc.
Section 19.01.After the commencement of the Tenant’s occupancy, except as otherwise set forth in this Lease, the Landlord shall not be
responsible for the loss of, or damage to, Tenant’s property or that is under its care, custody or control, or injury to Tenant occurring in or about the Demised
Premises, or for any business interruption loss, or for any reason whatsoever, including but not be limited to: any existing or future condition, defect, matter or
thing in the Demised Premises (but excluding, without limitation, Landlord’s obligations with respect to Legal Requirements as set forth in the Lease; the
acts, omissions or negligence of other persons or tenants in and about the Demised Premises (except as otherwise set forth in this Lease, including, without
limitation, that of Landlord or any Landlord Party); theft or burglary from the Demised Premises; the negligence of Landlord, its agents, servants or invitees
(except as otherwise set forth in this Lease); and defects, errors or omissions in the construction or design of the Demised Premises and/or the Building
including the structural and nonstructural portions thereof.
ARTICLE XX
Inspection, For Sale and For Rent Signs
Section 20.01. The Landlord, or its agents, shall have the right, upon not less than 48 hours prior written notice (which, notwithstanding the
provisions of Article XVI hereof, may be by electronic mail if Tenant has provided Landlord with the appropriate e-mail addresses) to enter the Demised
Premises at reasonable hours to examine the same, or to exhibit the Demised Premises to prospective purchasers and to place upon the Demised Premises a
suitable “For Sale” sign, which sign must be approved by the Tenant, which approval shall not be unreasonably withheld. For twelve (12) months prior to the
expiration of the Term, the Landlord, or its agents, may exhibit the Demised Premises to prospective tenants and may place the usual “To Let” signs thereon.
34
ARTICLE XXI
Signs
Section 21.01. No sign, advertisement or notice shall be affixed to or placed upon any part of the Demised Premises by the Tenant, except
in such manner, and of such size, design and color as shall be approved in advance in writing by the Landlord, which approval the Landlord shall not
unreasonably withhold, delay or condition, provided: (i) that Tenant complies with all applicable governmental ordinances and regulations pertaining to such
signage and receives all necessary governmental approvals required for the erection and maintenance of such signage, and (ii) no later than the last day of the
Term, Tenant shall, at Tenant’s expense, remove the sign and repair all injury done by or in connection with the installation or removal of the sign.
ARTICLE XXII
Advance Rent, Security and Late Charge
Three and 75/100 ($11,883.75) Dollars in advance for Monthly Basic Rent for the first month of the first Lease Year.
Section 22.01. Simultaneously herewith, the Tenant has deposited with the Landlord the sum of Eleven Thousand Eight Hundred Eighty-
Section 22.02. (a) Concurrently with the execution and delivery of this Lease, Tenant shall deposit with Landlord the sum of Thirty-Five
Thousand Six Hundred Fifty-One and 25/100 ($35,651.25) Dollars (hereinafter “Security Deposit”) either by check or by letter of credit as hereinafter set
forth in Section 22.03 below, as security for the full and faithful performance by Tenant of all of the terms and conditions upon the Tenant’s part to be
performed, which Security Deposit shall be returned to Tenant within thirty (30) days after the time fixed as the expiration or earlier termination of the Term
herein, provided Tenant has fully and faithfully carried out all of the terms, covenants and conditions on the Tenant’s part to be performed. In the event the
Landlord uses any of said Security Deposit to cure Tenant’s default(s) or meet any of Tenant’s obligations, Tenant covenants, upon demand, to replace the
amount so utilized or to provide an amended or replacement letter of credit as hereinafter set forth. In the event of a bona fide sale, subject to this Lease, the
Landlord shall transfer the Security Deposit to the vendee, and the Landlord shall be considered released by the Tenant from all liability for the return of such
Security Deposit provided the vendee has assumed Landlord’s obligations hereunder; and the Tenant agrees to look solely to the new landlord for the return of
the said Security Deposit, and it is agreed that this shall apply to every transfer or assignment made of the Security Deposit to a new landlord.
Notwithstanding anything in this Lease to the contrary, nor anything to the contrary in any purchase and sale, or sale-leaseback or other agreement of
transference of the landlord’s interest hereunder, such vendee, lease assignee, lessor, or other transferee shall, for all purposes, be deemed to have assumed the
obligations of Landlord hereunder from and after the effective date of the sale or other transfer, without the need of written evidence thereof. The security
deposited under this shall not be mortgaged, assigned or encumbered by the Tenant without the written consent of the Landlord.
(b) At all times during the Term or any extension or renewal thereof, the Security Deposit shall equal the sum of three (3) installments of
Monthly Basic Rent. As and when the Monthly Basic Rent increases, Tenant shall deposit with Landlord the difference between the then existing Security
Deposit and the aforementioned sum (hereinafter “Additional Security”). Failure of Tenant to deposit the Additional Security within ten (10) days after
Landlord’s written demand shall constitute a material breach of this Lease by Tenant.
35
Section 22.03. In the event of the insolvency of Tenant or in the event of the entry of a judgment in bankruptcy in any court against Tenant
which is not discharged within sixty (60) days after entry, or in the event a petition is filed by or against Tenant under any chapter of the bankruptcy laws of
the State of New Jersey or the United States of America, then and in such event Landlord may require the Tenant to deposit additional security in the amount
specified in Subsection 15.01(F) to adequately assure Tenant’s performance of all of its obligations under this Lease, including all payments subsequently
accruing. Failure of Tenant to deposit the security required by this Section 22.04 within ten (10) business days after Landlord’s written demand shall
constitute a material breach of this Lease by Tenant.
Section 22.04. Anything in this Lease to the contrary notwithstanding, at Landlord’s option, Tenant shall pay a “Late Charge” of seven
(7%) percent of any installment of Monthly Basic Rent or Additional Rent paid more than five (5) days after the due date thereof, to cover the extra expense
involved in handling delinquent payments; provided however, that Landlord shall notify Tenant each time Landlord elects to exercise its option to charge the
Late Charge, and Tenant shall have ten (10) business days after receipt of such notice to pay the Late Charge as Additional Rent.
ARTICLE XXIII
Financial Statements
Section 23.01.The Tenant agrees, within one hundred twenty (120) days after the end of the Tenant’s accounting year, at the request of the
Landlord, or at the request of the holder of any first mortgage upon the Demised Premises, to furnish to the Landlord or mortgagee, its certified balance sheet
and profit and loss statement for the last accounting year provided however, if Tenant does not have financials prepared by a certified public accountant, such
financial statements shall be certified by the CFO of the company, provided that Landlord or any such mortgagee shall execute a Nondisclosure
/Confidentiality Agreement prepared by Tenant and reasonably satisfactory to Landlord and any such mortgagee.
ARTICLE XXIV
Broker
Section 24.01. The Landlord and Tenant represent and warrant to the other that Studley Inc. is the sole broker (the “Broker”) which advised
Tenant of the availability of the Demised Premises for leasing and is the sole Broker which introduced Tenant to the Landlord. Landlord agrees that it shall
pay the commission, if any, which may be due to said Broker pursuant to a separate agreement between Landlord and the Broker. The Landlord and Tenant
agree to indemnify and hold each other harmless from any and all claims of other brokers and expenses in connection therewith arising out of or in connection
with the negotiation of or the entering into this Lease by Landlord and Tenant.
36
ARTICLE XXV
Commencement Date Agreement
Section 25.01. Promptly after the commencement of the Term the parties shall execute and deliver, in duplicate original counterparts, a
Commencement Date Agreement stating the commencement and expiration dates of the Term of this Lease.
ARTICLE XXVI
Waiver of Jury Trial/Non-Mandatory Counterclaims
Section 26.01. If Landlord commences any summary proceedings or an action for nonpayment of Term Basic Rent or Additional Rent,
Tenant shall not interpose any non-mandatory counterclaim of any nature or description in any such proceedings or action. Tenant and Landlord both waive a
trial by jury of any or all issues arising in any action or proceeding between the parties hereto or their successors under or connected with this Lease or any of
its provisions.
ARTICLE XXVII
Waiver of Distraint
Section 27.01. Landlord waives all lien, right, interest and claim it might otherwise have in and waives its right of distraint of, the
machinery, fixtures and other property of the Tenant, and in any other property of any nature whether on or off the Demised Premises, belonging to the
Tenant. The provisions of this Section are intended to apply to the Landlord’s common law (if any) and statutory right of distraint because of failure to pay
Term Basic Rent or Additional Rent. In the event Landlord is requested to execute a lien waiver or similar document evidencing that Landlord does not have a
lien on Tenant’s inventory, equipment or other personalty, then Tenant agrees to reimburse Landlord, as Additional Rent, for the reasonable legal fees and
costs incurred by Landlord in connection with reviewing and responding to such request, not to exceed One Thousand Dollars ($1,000.00).
ARTICLE XXVIII
Landlord’s Retained Rights
Section 28.01. (a) Subject to the terms and conditions hereof, Landlord reserves to itself, its successors and assigns, the full use of the roof;
however, Landlord shall not make any installations thereon other than solar panels and equipment related to the generation of solar power, and which shall be
for the exclusive use of the Building. Except as otherwise set forth in this Lease and subject to the terms and conditions of this Lease, Landlord hereby
reserves to itself, its successors and assigns, the right to grant, construct, maintain and use utility easements and drainage easements, across, through, over and
under the Demised Premises, Building and Real Property or to or from other lands and other portions of the Real Property now owned or in the future
acquired by the Landlord, and to construct and install pipes and other equipment necessitated thereby, provided the same to be at the sole cost of the Landlord
and provided such easements do not interfere with the use of or access to the Demised Premises by the Tenant by more than a de minimis degree.
37
(b) In the event that Landlord exercises its rights under this Section 28.01 and places solar panels and related equipment thereon, from and
after the date Landlord or its employees, agents or contractors enter upon the roof to perform such installations (or any other installations whether or not
permitted by this Lease), Landlord shall assume all responsibility for the maintenance in watertight condition, replacement and repair of the roof, and Sections
9.01, 12.01 and 12.02 shall be deemed modified accordingly. Upon request of Tenant, Landlord shall enter into a commercially reasonable written agreement
with Tenant acknowledging the date on which Landlord shall be deemed to have assumed liability for the maintenance, repair and replacement of the roof, but
the failure or refusal to sign the agreement by either party shall in no event affect the determination of such date or either party’s obligations hereunder. If
Tenant shall notify Landlord in writing of the need of roof repairs, Landlord shall use all commercially reasonable efforts to commence such repairs within
five (5) business days after receipt of notice thereof, and to thereafter diligently pursue such repairs to completion. If Landlord fails to commence such repairs
within the five (5) business day period, Tenant may send Landlord a reminder notice stating in BOLD AND CONSPICOUS LETTERS, that failure of
commence repair of the roof within five (5) business days after receipt of such notice shall entitle Tenant to commence making the repairs at Landlord’s cost
and expense, and if Landlord thereafter fails to timely commence such repairs and thereafter to diligently pursue same to completion, Tenant shall have the
right to make such repairs at Landlord’s sole cost and expense, and Landlord shall reimburse Tenant for Tenant’s actual costs and expenses incurred in
connection therewith within thirty (30) days after receipt of Tenant’s bill therefor accompanied by reasonable substantiation of the charges therein. If
Landlord fails to timely reimburse Tenant, Tenant may send Landlord a reminder notice stating in BOLD AND CONSPICOUS LETTERS, that Landlord’s
failure to pay said charges within five (5) business days following receipt of such reminder notice shall entitle Tenant to offset the amount stated in Tenant’s
bill against the next due installments of Basic Rent however, in no event shall Tenant deduct more than twenty (20%) percent from each monthly installment
until such time as Tenant has been fully reimbursed for its expenditures for such roof repairs.
Section 28.02. Subject to approval by all applicable governmental authorities and compliance with all applicable Legal Requirements,
Tenant shall have the right, at Tenant’s sole option, to install an antenna or satellite “dish”, or similar device for the reception and transmission of signals with
its home office or other stores (“Device”), on the roof of the Building in a location to be mutually agreed upon, subject to Landlord’s prior written approval of
such location and Tenant’s plans and specifications, such approval not to be unreasonably withheld, conditioned or delayed. The Device shall be utilized
solely for Tenant’s business operations and shall be screened so that it is not be visible from the parking areas. The Device shall be installed at Tenant’s
expense and Tenant shall comply with all laws, ordinances and regulations relating to the installation, use and maintenance of the Device. Tenant will ensure
that the Device, and each part of it, will be installed in accordance with all Legal Requirements and shall repair all damage to the Premises and building
(including but not limited to the roof of the Premises) caused as a result of Tenant’s installation, maintenance or removal of the Device. The Device is and
shall remain the property of Tenant or Tenant’s assignee, transferee or sublessee, and Landlord and Tenant agree that the Device is not, and installation of the
Device at the Demised Premises shall not cause the Device to become, a fixture pursuant to this Lease or by operation of law. Tenant shall be responsible for
the replacement, repair and maintenance of the Device during the Term of this Lease at its sole cost and expense, and upon the termination of this Lease shall
remove said Device and repair damage caused as a result of such installation or removal. Any roof penetrations caused by Tenant shall not invalidate the roof
warranty. Roof penetrations if any, shall be performed only by Landlord’s designated contractor at Tenant’s expense. All damage caused to the roof by Tenant,
its agents, servants, employees or contractors shall be repaired by a Landlord’s designated contractor, at Tenant’s sole cost and expense. Tenant shall
indemnify, defend and hold Landlord harmless from and against all costs, expenses, claims, suits, causes of action, liabilities, losses, injuries, and damage,
including, without limitation, reasonable attorneys' fees and costs for damage or injury to persons or their property caused by the installation, repair,
replacement or removal of the Device. Except as expressly set forth in this Section, Tenant shall have no other rights to make any other installations on the
roof of the Building.
38
ARTICLE XXIX
Miscellaneous
Section 29.01. Partial Invalidity. If any term or provision of this Lease or the application thereof to any party or circumstances shall to any
extent be invalid or unenforceable, the remainder of this Lease or the application of such term or provision to parties or circumstances other than those to
which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest
extent permitted by law.
Section 29.02. Waivers. (a) One or more waivers by either party of the obligation of the other to perform any covenant or condition shall
not be construed as a waiver of a subsequent breach of the same or any other covenant or condition.
(b) The receipt of Monthly Basic Rent and Additional Rent by the Landlord, with knowledge of any breach of this Lease by the Tenant
or of any default on the part of the Tenant in the observance or performance of any of the conditions or covenants of this Lease, shall not be deemed to be a
waiver of any provision of this Lease. Neither acceptance of the keys nor any other act or thing done by the Landlord or any agent or employee during the
Term herein demised shall be deemed to be an acceptance of a surrender of said Demised Premises, excepting only an agreement in writing signed by the
Landlord accepting or agreeing to accept such surrender.
(c) The receipt of any sum of money or reimbursement or refund by Tenant, with knowledge of any breach of this Lease by the Landlord
or of any default on the part of the Landlord in the observance or performance of any of the conditions or covenants of this Lease, shall not be deemed to be a
waiver of any provision of this Lease.
shall include the feminine and neuter genders.
Section 29.03. Number, Gender. Wherever herein the singular number is used, the same shall include the plural, and the masculine gender
the respective parties and their successors and assigns.
Section 29.04. Successors, Assigns. The terms, covenants and conditions herein contained shall be binding upon and inure to the benefit of
Section 29.05. Headings. The Article and marginal headings herein are intended for convenience in finding the subject matters, are not to
be taken as part of this Lease and are not to be used in determining the intent of the parties to this Lease.
39
Section 29.06. Entire Agreement. This instrument contains the entire and only agreement between the parties and no oral statements or
representations or prior written matter not contained in this instrument shall have any force or effect. This Lease shall not be modified in any way or
terminated except by a writing executed by both parties.
Section 29.07. Landlord. The term “Landlord” as used in this Lease means only the holder, for the time being, of the Landlord’s interest
under this Lease so that in the event of any transfer of title to the Demised Premises the Landlord shall be and hereby is entirely freed and relieved of all
obligations of the Landlord hereunder accruing after such transfer, and it shall be deemed without further agreement between the parties that such grantee,
transferee or assignee has assumed and agreed to observe and perform all obligations of the Landlord hereunder arising during the period it is the holder of
the Landlord’s interest hereunder.
same force and effect as though made in the form of covenants.
Section 29.08. Words of Duty. Whenever in this Lease any words of obligation or duty are used, such words or expressions shall have the
Section 29.09. Cumulative Remedies. The specified remedies to which the Landlord or the Tenant may resort under the terms of this Lease
are cumulative and are not intended to be exclusive of any other remedies or means of redress to which the Landlord or the Tenant may lawfully be entitled in
case of any breach or threatened breach of any provision of this Lease.
Section 29.10. No Option. The submission of this Lease Agreement for examination does not constitute a reservation of, or option for, the
Demised Premises, and this Lease Agreement becomes effective as a Lease Agreement only upon execution and delivery thereof by Landlord and Tenant.
Section 29.11. Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a lesser amount than the Monthly Basic Rent and
additional charges payable hereunder shall be deemed to be other than a payment on account of the earliest stipulated Monthly Basic Rent and Additional
Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment for Basic Rent or Additional Rent be deemed an
accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such Basic Rent and
Additional Rent or pursue any other remedy provided herein or by law. No payment by Landlord to Tenant of a lesser amount than that owed to Tenant shall
be deemed to be other than payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment of
sums owed to Tenant be deemed an accord and satisfaction, and Tenant may accept such check or payment without prejudice to Tenant’s right to recover the
balance of any such amounts owed to Tenant or to pursue any other remedy provided herein or by law.
Section 29.12. Authority. (a) Tenant represents and warrants to Landlord it has full right, power and authority to enter into this Lease
without the consent or approval of any other entity or person and makes this representation knowing that the Landlord party will rely thereon. The signatory
on behalf of Tenant further represents and warrants that it has full right, power and authority to act for and on behalf of Tenant in entering into this lease.
40
(b) Landlord represents and warrants to Tenant that it is the fee owner of the Demised Premises and the Real Property, it has full right,
power and authority to enter into this Lease without the consent or approval of any other entity or person and makes this representation knowing that Tenant
will rely thereon. The signatory on behalf of Landlord further represents and warrants that it has full right, power and authority to act for and on behalf of
Landlord in entering into this lease.
Section 29.13. Lease Commencement. If Landlord, for any reason whatsoever including Landlord’s negligence, cannot deliver possession
of the Demised Premises to Tenant at the commencement of the agreed Term as set forth in Section 2.01, this Lease shall not be void or voidable but it shall
be terminable as set forth in said Section 2.01, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom except as set forth in said
Section 2.01, but in that event, the Term shall be for the full Term as specified above to commence from and after the date Landlord shall have delivered
possession of the Demised Premises to Tenant, and, if requested by Landlord, Landlord and Tenant shall, by a writing signed by the parties, ratify and confirm
said commencement and termination dates.
Section 29.14. As used in this Lease, Real Estate Taxes shall mean the property taxes and assessments imposed upon the Real Property
including the Building, or upon the Term Basic Rent and Additional Rent, as such, payable to Landlord, including, but not limited to, real estate, city, county,
village, school and transit taxes, or taxes, assessments or changes levied, imposed, or assessed against the Demised Premises including the Building by any
other lawful taxing authority, whether general or specific, ordinary or extraordinary, foreseen or unforeseen, less any tax exemptions and abatements granted
pursuant to any law or ordinance. Real Estate Taxes shall not include (i) any income, franchise, gross receipts, use or “value added” taxes, transfer or gains
taxes, corporation, capital levy, excess profits, revenue, inheritance, devolution, gift, estate, payroll or stamp tax, by whatever authority imposed or however
designated, nor any interest or penalties payable because of late payment of Real Estate Taxes (unless such late payment is due solely to the late payment by
Tenant), If due to a future change in the method of taxation, any franchise, income or profit tax or other tax shall be levied against Landlord in substitution
for, or in lieu of, or in addition to, any tax which would otherwise constitute a Real Estate Tax, such franchise, income or profit tax or other tax shall be
deemed to be a Real Estate Tax for the purposes hereof; conversely, any additional real estate tax hereafter imposed in substitution for, or in lieu of, any
franchise, income or profit tax or other tax (which is not in substitution for, or in lieu of, or in addition to, a Real Estate Tax as hereinbefore provided) shall
not be deemed a Real Estate Tax for the purposes hereof.
Section 29.15. Execution. This Lease may be executed in one or more counterparts, each of which counterparts shall be an original. An
executed copy of this Lease may delivered by facsimile or electronic mail with the same effect as if an executed original counterpart were delivered; however,
upon request of any party hereto, the parties shall promptly execute and deliver to all parties hereto, “hard” duplicate original copies with original inked
signatures.
Section 29.16. Force Majeure. Force Majeure shall mean and include those situations beyond a party’s control, including by way of
example and not by way of limitation, acts of God; accidents; repairs; strikes; shortages of labor, supplies or materials; inclement weather; or, where
applicable, the passage of time while waiting for an adjustment of insurance proceeds. Any time limits required to be met by either party hereunder, whether
specifically made subject to Force Majeure or not, except those related to the payment of Basic Rent or Additional Rent and except as to the time periods set
forth in Article XVII, shall, unless specifically stated to the contrary elsewhere in this Lease, be automatically extended by the number of days by which any
performance called for is delayed due to Force Majeure.
41
Section 29.17. Applicable Law. This Lease shall be governed by and construed and enforced in accordance with the laws by the Courts of
the State of New Jersey (excluding New Jersey conflict laws) and by the Courts of New Jersey.
Section 29.18. Memorandum of Lease. This Lease shall not be filed of record in any office or place of public record, without Landlord’s
and Tenant’s consent; but on request of either party, Landlord and Tenant shall execute, acknowledge and deliver to each other duplicate originals of a
memorandum of this Lease, substantially in the form attached hereto as Exhibit F, and on request of either party a memorandum or short form of any
modification of this Lease, in recordable form, containing the information required by law for recording and such other provisions as either party may
reasonably request (other than rental terms), so as to give notice of the provisions of this Lease or said modification, as the case may be. In the event that a
memorandum of this Lease is recorded, the parties shall simultaneously execute a Discharge of Memorandum in the form of Exhibit G to be held in escrow
by Landlord’s counsel and not recored until the expiration or sooner termination of this Lease.
Section 29.19. Lease Year. The first Lease Year shall be the period commencing on the Rent Commencement Date and ending twelve (12)
months after the last day of the month in which the Rent Commencement Date occurs, and each succeeding twelve (12) month period thereafter shall be a
Lease Year.
Section 29.20. Intentionally omitted.
context otherwise requires:
Section 29.21. Rules of Construction. The following rules of construction shall be applicable for all purposes of this Lease unless the
(a) The terms “hereby”, “hereof”, “hereto”, “herein”, “hereunder” and any similar terms shall refer to this Lease, and “hereafter”
shall mean after, and “heretofore” shall mean before, the date of this Lease.
“without being limited to”.
(b) The terms “include”, “including”, “exclude”, “excluding” and similar terms shall be construed as if followed by the phrase
(c) The term “and/or” when applied to one or more matters or things shall be construed to apply to any one or more or all thereof as the
circumstances warrant at the time in question.
“reasonable costs” so incurred.
(d) Whenever a part shall have the right of self-help, the costs incurred on account of the other party shall be deemed to be only the
(e) Wherever there appears an express right of self-help, or an express right of one party to expend monies on behalf of the other party,
the party seeking to exercise such right of self-help shall first send a reminder /warning notice and provide an appropriate time period for cure (except in an
emergency situation) before the party seeking to exercise such right of self-help exercises such right or expends funds on behalf of the other party.
42
(f) As used herein the term “business days” shall mean Monday through Friday exclusive of Holidays.
(g) As used herein the term “Holidays” shall mean all holidays observed by the federal government and/or the State of New Jersey.
ARTICLE XXX
Personal Liability
Section 30.01. Notwithstanding anything to the contrary provided in this Lease, it is specifically understood and agreed, such agreement
being a primary consideration for the execution of this Lease by Landlord, that there shall be absolutely no personal liability on the part of Landlord, its
successors, assigns or any mortgagee in possession (for the purposes of this Section, collectively referred to as “Landlord”), with respect to any of the terms,
covenants and conditions of this Lease, and that Tenant shall look solely to the equity of Landlord and the proceeds of any insurance or other awards in the
Building for the satisfaction of each and every remedy of Tenant in the event of any breach by Landlord of any of the terms, covenants and conditions of this
Lease to be performed by Landlord, such exculpation of liability to be absolute and without any exceptions whatsoever.
ARTICLE XXXI
Rent Concession
Section 31.01. Notwithstanding anything contained herein to the contrary, and provided Tenant is not in default under any of the terms and
provisions of this Lease, the Tenant shall not be obligated to pay Basic Rent for the first sixty (60) days of the Term beginning on the Commencement Date
(the “Concession Period”). Notwithstanding the foregoing, Tenant shall nevertheless be obligated to fulfill all of its other obligations required by this Lease
during the aforedescribed period including by way of example but not of limitation, those requirements described in Articles VII and VIII.
ARTICLE XXXII
Intentionally Omitted.
ARTICLE XXXIII
Guaranty
Section 33.01. This Lease is expressly conditioned on the execution by KORNIT DIGITAL LTD. of the guaranty of the terms, covenants
and conditions in this Lease to be performed and observed by Tenant in the form and substance attached hereto and made a part hereof as Exhibit E.
43
ARTICLE XXXIV
Cancellation Option
Section 34.01. Tenant at its option will have a one-time right to cancel and terminate the Lease effective on the last day of the fifth (5th)
Lease Year of the Term (the “Cancellation Date”). Tenant shall provide one hundred eighty (180) days prior written notice of its election to cancel the Lease,
TIME HEREBY BEING MADE OF THE ESSENCE.. The right to cancel the Lease shall be conditioned upon the following: there being no uncured Event of
Default under the Lease and Tenant paying a cancellation fee at the time it sends its cancellation notice equal to four (4) months of the Basic Monthly Rent
due at the time of the Cancellation Date (FIFTY-THREE THOUSAND FIVE HUNDRED ONE AND 08/00 DOLLARS) ($53,501.08), plus the unearned real
estate commission in the amount of FORTY-SIX THOUSAND EIGHT HUNDRED SIXTY-SEVEN DOLLARS ($46,867.00). Tenant shall also enter into a
mutually acceptable Surrender and Acceptance Agreement effective as of the Cancellation Date, continue to perform all of the terms and conditions of the
Lease until the Cancellation Date and actually vacates the Demised Premises and deliver possession in the condition required by the Lease at the scheduled
expiration date on or before the Cancellation Date free and clear of liens, encumbrances and tenancies of any kind or nature. Upon Tenant’s compliance with
all of the terms and conditions of this Section 34.01, Tenant shall be released from its obligations as contained in this Lease, as if said Cancellation Date were
the scheduled expiration date of the Lease.
[NO FURTHER TEXT – SIGNATURE PAGE TO FOLLOW]
44
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day and year first above written.
BONANNO REAL ESTATE GROUP I, L.P.,
Landlord
/s/ Max Bonanno
By:
Name: Max Bonanno
Title: General Partner
KORNIT DIGITAL NORTH AMERICA, INC.,
Tenant
By:
Name: Shai Terem
Title: President
/s/ Gabi Seligsohn /s/ Guy Avidan
By:
Name: Gabi Seligsohn Guy Avidan
Title: CEO CFO
45
EXHIBIT A
A-1
EXHIBIT B
INTENTIONALLY OMITTED
B-1
EXHIBIT C
TENANT’S WORK
Tenant shall make the following improvements to the space at Tenant's sole cost and expense.
● Replacing or refurbishing all of the windows in the warehouse
● Potentially reconfiguring or adding to the office space (with Landlord approval)
● Polishing or Epoxy Floor in the Warehouse
● Adding Warehouse lighting
● Paint and Carpet the office space
C-1
EXHIBIT C-1
TENANT’S INITIAL PLANS AND SPECIFICATIONS
C-1-1
PERMISSIBLE QUANTITIES AND CHEMICALS WHICH MAY BE STORED AT THE DEMISED PREMISES
EXHIBIT D
D-1
EXHIBIT E
GUARANTY
WHEREAS, KORNIT DIGITAL NORTH AMERICA, INC., a Delaware corporation, with offices at 10541-10601North Commerce Street,
Mequon, WI 53092, USA (hereinafter referred to as the “Tenant”) is desirous of entering into the lease hereinafter mentioned; and
WHEREAS, KORNIT DIGITAL LTD, an Israeli company with offices at 12 Ha’Amal St., Rosh Ha’Ayin Haayin Israel (hereinafter referred to as
“Guarantor”) has requested BONANNO REAL ESTATE GROUP I, L.P, with offices at 107 West Tryon Avenue, Teaneck, New Jersey 07666 (hereinafter
referred to as “Landlord”) to enter into a lease with the Tenant for an initial Term of five (5) Lease Years, in the building located at 480 South Dean Street, in
the City of Englewood, County of Bergen, State of New Jersey; and
WHEREAS, the Landlord has refused to enter into the said Lease unless Guarantor guarantees said Lease in the manner hereinafter set forth.
NOW, THEREFORE, to induce the Landlord to enter into said Lease, which Lease is dated this day and is being executed simultaneously herewith,
the Guarantor hereby agrees as follows:
1. The Guarantor unconditionally guarantees to the Landlord and the successors and assigns of the Landlord, (a) the full and punctual
performance and observance by the Tenant of all of the terms, covenants and conditions in said Lease contained on Tenant’s part to be kept, performed or
observed but expressly excluding any acceleration of Rents.
2. (a) The Guarantor unconditionally guarantees to the Landlord and the successors and assigns of the Landlord, the full and punctual
performance and observance by the Tenant of all of the terms, covenants and conditions in said Lease contained on Tenant’s part to be kept, performed or
observed. This is a guaranty of payment and performance and not of collection. Landlord may demand payment from Guarantor without first seeking
payment from Tenant. Landlord does not have to notify Guarantor that Tenant has failed to meet any of its obligations under the Lease, or that Guarantor is
obligated to make a payment or perform any obligation pursuant to this Guaranty. The liability of Guarantor under this Guaranty will not be modified or
terminated because of any changes to the Lease made by Landlord and Tenant or by any waiver of any of the provisions of the Lease by Landlord. Guarantor
expressly acknowledges that if Tenant holds over beyond the term of the Lease, the obligations of Guarantor hereunder shall extend to and apply to Tenant’s
obligations incurred during the holdover period.
(b) If at any time, default shall be made by the Tenant in the performance or observance of any of the terms, covenants or conditions in
said Lease contained on the Tenant’s part to be kept, performed or observed, the Guarantor will keep, perform and observe the same, as the case may be, in
place and stead of the Tenant.
E-1
3. The liability of the Guarantor hereunder shall be enforceable against the Guarantor without the necessity for any suit or proceedings on the
Landlord’s part of any kind or nature whatsoever against the Tenant.
4. Any act of the Landlord, or the successors or assigns of the Landlord, consisting of a waiver of any of the terms or conditions of said Lease, or
the giving of any consent to any manner or thing relating to said Lease, or the granting of any indulgences or extensions of time, to the Tenant, may be done
without notice to the Guarantor and without releasing the obligations of the Guarantor hereunder.
5. The obligations of the Guarantor hereunder shall not be released by Landlord’s receipt, application or release of security given for the
performance and observance of covenants and conditions in said Lease contained on the Tenant’s part to be performed or observed; nor by any modification
of such Lease, but in the case of any such modification, the liability of the Guarantor shall be deemed modified in accordance with the terms of any such
modification of the Lease.
6. The liability of the Guarantor hereunder shall in no way be affected by (a) the release or discharge of the Tenant in any creditors’ receivership,
bankruptcy or other proceedings; (b) the impairment, limitation or modification of the liability of the Tenant or the estate of the Tenant in bankruptcy, or of
any remedy for the enforcement of the Tenant’s said liability under the Lease, resulting from the operation of any present or future provision of the
Bankruptcy Code or other statute or from the decision in any court; (c) the rejection or disaffirmance of the Lease in any such proceedings; (d) the assignment
or transfer of the Lease by the Tenant; (e) any disability or other defense of the Tenant; or (f) the cessation from any cause whatsoever of the liability of the
Tenant.
7. Until all the covenants and conditions in said Lease on the Tenant’s part to be performed and observed are fully performed and observed, the
Guarantor: (a) shall have no right of subrogation against the Tenant by reasons of any payments or acts of performance by the Guarantor hereunder; (b)
waives any right to enforce any remedy which the Guarantor now or hereafter shall have against the Tenant by reason of any one or more payment or acts of
performance in compliance with the obligations of the Guarantor hereunder; and (c) subordinates any liability or indebtedness of the Tenant now or hereafter
held by the Guarantor to the obligations of the Tenant to the Landlord under said Lease.
8. (a) Notwithstanding any payments of Basic Rent or Additional Rent made by the undersigned pursuant to the provisions of this Guaranty,
the undersigned shall not seek to enforce or collect upon any rights which the undersigned now has or may acquire against the Tenant either by way of
subrogation, indemnity, reimbursement or contribution for any amount paid under this Guaranty. In the event either a petition is filed under the Bankruptcy
Code or under any other applicable Federal or state insolvency law in regard to the Tenant, or an action or proceeding is commenced for the benefit of the
creditors of the Tenant, and the Landlord is ordered to repay all or any portion of any payments made to Landlord which were received from or on behalf of
the Tenant and which are held voidable on the grounds of preference, fraudulent conveyance or otherwise, the undersigned shall pay to the Landlord an
amount equal to such payments held to be voidable, provided, however, that the aggregate of all payments made by the undersigned under this Guaranty shall
not exceed the amount of the Basic Rent and Additional Rent arrears then due and payable and further provided that such payments shall not be accelerated.
E-2
(b) If at any time payment, or portion thereof, made by or for the account of the undersigned on account of the obligations under this Guaranty, is
set aside by any court or trustee having jurisdiction as a voidable preference, fraudulent conveyance or otherwise as being subject to avoidance or recovery
under the provisions of the Bankruptcy Code or under any other applicable Federal or state insolvency law or similar law, the undersigned hereby agrees that
this Guaranty (a) shall continue and remain in full force and effect, and (b) if previously terminated as a result of the undersigned having fulfilled the
undersigned’s obligations hereunder in full or as a result of the Landlord having released the undersigned from its obligations and liabilities hereunder, shall
without further act or instrument be reinstated and shall thereafter remain in full force and effect, in either case with the same force and effect as though such
payment or portion thereof had not been made, and, if applicable, as if such previous termination had not occurred.
9. This Guaranty shall apply to the initial Term of the Lease and to any renewal or extension thereof.
10. This instrument may not be changed, modified, discharged or terminated orally or in any manner other than by an agreement in writing
signed by the Guarantor and the Landlord.
11. This Guaranty shall be governed by and construed and enforced in accordance with the laws by the Courts of the State of New Jersey
(excluding New Jersey conflict laws) and by the Courts of New Jersey. Guarantor herby submits to the jurisdiction of the Courts of the State of New Jersey.
12. All notices, demands or other communications (collectively, “Notices”) desired or required to be given under this Guaranty shall be made in
accordance with Article XVI of the Lease.
13. This Guaranty may be executed in one or more counterparts, each of which counterparts shall be an original. An executed copy of this
Guaranty may delivered by facsimile or electronic mail with the same effect as if an executed original counterpart were delivered; however, upon request of
any party hereto, the parties shall promptly execute and deliver to all parties hereto, “hard” duplicate original copies with original inked signatures.
GUARANTOR HEREBY WAIVES THE RIGHT TO A JURY TRIAL IN ANY ACTION OR PROCEEDING THAT MAY HEREAFTER
BE INSTITUTED BY LANDLORD AGAINST GUARANTOR WITH RESPECT TO THIS GUARANTY. GUARANTOR SHALL PAY TO
LANDLORD ALL OF LANDLORD’S EXPENSES, INCLUDING, BUT NOT LIMITED TO, REASONABLE ATTORNEYS’ FEES AND OTHER
COSTS INCURRED IN ENFORCING THE PROVISIONS OF THIS GUARANTY.
E-3
IN WITNESS WHEREOF, the Guarantor has hereunto set his hands and seals the _____ day of___________, 2017
KORNIT DIGITAL LTD, GUARANTOR
By:
Name:
Title:
By:
Name:
Title:
E-4
EXHIBIT F
MEMORANDUM OF LEASE
Prepared By:
Mitchell W. Abrahams, Esq.
RECORD and RETURN TO:
Mitchell W. Abrahams, Esq.
Cole, Schotz, P.C.
Court Plaza North
25 Main Street
P.O. Box 800
Hackensack, New Jersey 07602-0800
THIS MEMORANDUM OF LEASE is made and entered into this ____ day of ________, 2017, by and between Bonanno Real Estate Group I,
L.P., a New Jersey limited partnership, with offices at 107 West Tryon Avenue, Teaneck, New Jersey 07666 (“Landlord”), and Kornit Digital North America,
Inc., a Delaware corporation, with offices at 10541-10601North Commerce Street, Mequon, WI 53092, USA (“Tenant”).
MEMORANDUM OF LEASE
W I T N E S S E T H:
1. Landlord, in consideration of the rents and upon the terms, conditions, covenants and agreements set forth in that certain Lease dated _______,
2017 (the “Lease”) between Landlord and Tenant, has leased to Tenant the premises, which includes the building and that certain parcel of land, upon which
the building is situated, located at 480 South Dean Street, in the City of Englewood, County of Bergen, State of New Jersey designated on the current Tax
Map as Lot 4, Block 3005 as more particularly described on Exhibit A attached hereto and made a part hereof and a portion of the land located at 470 South
Dean Street, in the City of Englewood, County of Bergen, State of New Jersey, designated on the current Tax Map as Lot 3, Block 3005(collectively, the
“Property”).
2. The term of the Lease commences subject to its terms on delivery of the premises by the Landlord in the condition required by the Lease, and
is for a period of ten (10) Lease Years, as that term is defined in the Lease.
3. The addresses of Landlord and Tenant are as set forth above and copies of the Lease are on file with Landlord and Tenant at said addresses.
4. The purpose of this Memorandum of Lease is to give record notice of the Lease, Tenant’s right of access and use of the Property and of the
other rights created thereby, the terms and conditions of which Lease are hereby incorporated by reference as if fully set forth herein. If any term or condition
of this Memorandum of Lease shall conflict with any term or condition of the Lease, the terms and conditions of the Lease shall control.
F-1
IN WITNESS WHEREOF, the undersigned have duly executed these presents under seal as of the day and year first above written.
WITNESS:
Name:
WITNESS:
Name:
WITNESS:
Name:
LANDLORD:
Bonanno Real Estate Group I, L.P.
By:
Name:
Title:
TENANT:
Kornit Digital North America, Inc.
By:
Name:
Title:
By:
Name:
Title:
F-2
STATE OF NEW JERSEY
COUNTY OF BERGEN
)
)ss:
)
I CERTIFY that on ____________, 2017, ______________________, personally came before me and this person acknowledged under oath, to my
satisfaction, that:
(a)
(b)
this person was the maker of this Memorandum of Lease;
this person was authorized to and did execute this Memorandum of Lease as General Partner of Bonanno Real Estate Group I, L.P., the
entity named in this Memorandum of Lease; and
(c)
this person executed this Memorandum of Lease as the act of the entity.
By:
Name:
Title: Notary Public
F-3
STATE OF _____________
COUNTY OF ___________
)
)ss:
)
I CERTIFY
that on _____________, 2017, __________________, personally came before me, ______________________ and
______________________, and each such person acknowledged under oath, to my satisfaction, that:
(a)
(b)
each person was the maker of this Memorandum of Lease;
each person was authorized to and did execute this Memorandum of Lease as ______________________ and ______________________,
respectively, of Kornit Digital North America, Inc., the entity named in this Memorandum of Lease; and
(c)
each person executed this Memorandum of Lease as the act of the entity.
By:
Name:
Title: Notary Public
F-4
EXHIBIT A
BEGINNING at a point in the northwesterly line of South Dean Street where same is intersected by the northeasterly line of property conveyed by
Rockwood Industrial Corporation to Durham Realty Co., by Deed dated June 21, 1961, recorded in the Office of the Clerk of Bergen County in Book 4256,
page 419, and thence running (1) North 55 degrees 7 minutes west and along said northeasterly line of property conveyed to Durham Realty Co., as aforesaid
a distance of 217.35 feet to the southeasterly line of the property of Northern Railroad of New Jersey; thence (2) North 34 degrees 53 minutes east and along
said southeasterly line of Northern Railroad of New Jersey, 150.0 feet to a point; thence (3) South 55 degrees 7 minutes east 205.00 feet, more or less, to the
aforesaid northwesterly line of South Dean Street; thence (4) South 30 degrees 17 minutes 30 seconds west and along said northwesterly line of South Dean
Street 152.5 feet to the point or place of BEGINNING.
EXHIBIT B
EXHIBIT G
DISCHARGE OF MEMORANDUM
Prepared By:
Mitchell W. Abrahams, Esq.
RECORD and RETURN TO:
Mitchell W. Abrahams, Esq.
Cole Schotz, P.C.
Court Plaza North
25 Main Street
P.O. Box 800
Hackensack, New Jersey 07602-0800
DISCHARGE OF MEMORANDUM OF LEASE
THIS DISCHARGE OF MEMORANDUM OF LEASE is made and entered into this ____ day of ________, 20____, by and between Bonanno
Real Estate Group I, L.P., a New Jersey limited partnership, with offices at 107 West Tryon Avenue, Teaneck, New Jersey 07666 (“Landlord”), and Kornit
Digital North America, Inc., a Delaware corporation, with offices at 10541-10601North Commerce Street, Mequon, WI 53092, USA (“Tenant”).
W I T N E S S E T H:
5. A certain Lease (the “Lease”), dated December ___, 2017, was made by and between Landlord and Tenant relating to that which includes the
building and that certain parcel of land, upon which the building is situated, located at 480 South Dean Street, in the City of Englewood, County of Bergen,
State of New Jersey designated on the current Tax Map as Lot 4, Block 3005 as more particularly described on Exhibit A attached hereto and made a part
hereof and a portion of the land located at 470 South Dean Street, in the City of Englewood, County of Bergen, State of New Jersey, designated on the current
Tax Map as Lot 3, Block 3005, as more particularly described on Exhibit B (collectively, the “Property”).
6. In connection with said Lease, a certain Memorandum of Lease was recorded or registered in the office of the county recording officer of
Bergen County on ___, 201_, in Deed Book ____, Page ____.
7. The Lease has expired in accordance with its terms or an Event of Default (as defined in the Lease) has occurred under the Lease and remains
uncured, and the Lease has been terminated on account of the same by Landlord in accordance with the terms of the Lease. Accordingly, this Discharge of
Memorandum of Lease provides notice that the Memorandum of Lease is now cancelled and void.
8. The Clerk of Bergen County, New Jersey is hereby authorized and directed to cancel and discharge of record the Memorandum of Lease.
G-1
IN WITNESS WHEREOF, the undersigned have duly executed these presents under seal as of the day and year first above written.
WITNESS:
Name:
WITNESS:
Name:
WITNESS:
Name:
LANDLORD:
Bonanno Real Estate Group I, L.P.
By:
Name:
Title:
TENANT:
Kornit Digital North America, Inc.
By:
Name:
Title:
By:
Name:
Title:
G-2
STATE OF _____________
COUNTY OF ___________
)
)ss:
)
I CERTIFY that on __________ ___, 20___, ________________ personally came before me and this person acknowledged under oath, to my
satisfaction, that:
(a)
(b)
this person was the maker of this Discharge of Memorandum of Lease;
this person was authorized to and did execute this Discharge of Memorandum of Lease as General Partner of Bonanno Real Estate Group I,
L.P., the entity named in this Discharge of Memorandum of Lease; and
(c)
this person executed this Discharge of Memorandum of Lease as the act of the entity.
By:
Name:
Title: Notary Public
G-3
STATE OF _____________
COUNTY OF ___________
)
)ss:
)
I CERTIFY
that on _________ ___, 20___, ______________ personally came before me _______________________ and
______________________ and each such person acknowledged under oath, to my satisfaction, that:
(a)
(b)
each person was the maker of this Discharge of Memorandum of Lease;
each person was authorized to and did execute this Discharge of Memorandum of Lease as ______________ and ______________,
respectively, of Kornit Digital North America, Inc., the entity named in this Discharge of Memorandum of Lease; and
(c)
each person executed this Discharge of Memorandum of Lease as the act of the entity.
By:
Name:
Title: Notary Public
G-4
SUBSIDIARIES OF KORNIT DIGITAL LTD.
Name of Subsidiary
Jurisdiction of Organization
Ownership Interest
Kornit Digital Technologies Ltd.
Kornit Digital North America Inc.
Kornit Digital Europe GmbH
Kornit Digital Asia Pacific Limited.
Kornit Digital UK Ltd
Israel
Delaware
Germany
Hong Kong
England and Wales
100%
100%
100%
100%
100%
Exhibit 8.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 12.1
I, Gabi Seligsohn, certify that:
1. I have reviewed this annual report on Form 20-F of Kornit Digital Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
company and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over
financial reporting.
Date: March 20, 2018
By: /s/ Gabi Seligsohn
Gabi Seligsohn
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 12.2
I, Guy Avidan, certify that:
1. I have reviewed this annual report on Form 20-F of Kornit Digital Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
company and have:
(e)
(f)
(g)
(h)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over
financial reporting.
Date: March 20, 2018
By: /s/ Guy Avidan
Guy Avidan
Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
Exhibit 13.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(b)/RULE 15d-14(b) UNDER THE EXCHANGE ACT
AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Kornit Digital Ltd. (the “Company”) on Form 20-F for the fiscal year ended December 31, 2017 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), we, Gabi Seligsohn, as Chief Executive Officer of the Company, and Guy
Avidan, as Chief Financial Officer of the Company, each certify in such respective capacity, pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Securities
Exchange Act of 1934, as amended and 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 20, 2018
By: /s/ Gabi Seligsohn
Gabi Seligsohn
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Guy Avidan
Guy Avidan
Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-203970, 333-214015 and 333-217039) and Registration
Statement (Form F-3 No. 333-215404) of our report dated March 20, 2018, with respect to the consolidated financial statements of Kornit Digital Ltd. and its
subsidiaries included in this Annual Report (Form 20-F) for the year ended December 31, 2017.
Consent of Independent Registered Public Accounting Firm
Exhibit 15.1
Tel Aviv, Israel
March 20, 2018
/s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global