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, 2018
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, 2018, the registrant had outstanding:
35,065,200 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.
☐ Yes ☒ No
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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
i
1
2
2
3
3
3
26
44
44
62
85
88
89
90
106
107
108
108
108
109
109
109
109
110
110
110
110
110
111
111
111
112
F-1
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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 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 plans regarding our distribution strategy for our products;
● our plans related to the development of our new, modern manufacturing facility in Kiryat Gat, Israel;
● 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.
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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.
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.
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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, 2016, 2017 and 2018 and selected consolidated balance sheet
data as of December 31, 2017 and 2018 are derived from our audited consolidated financial statements appearing in ITEM 18. Financial Statements. The
selected consolidated statements of income data for the years ended December 31, 2014 and 2015 and the selected consolidated balance sheet data as of
December 31, 2014, 2015 and 2016 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.
2014
Year Ended December 31,
2016
(in thousands, except share and per share data)
2017
2015
2018
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 (tax benefit)
Taxes on income (tax benefit)
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
$
$
$
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
142,373
72,504
69,869
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) $
21,912
25,596
16,436
321
64,265
5,604
1,433
7,037
(5,392)
12,429
0.36
0.35
8,969,588
10,446,329
24,633,369
26,458,584
30,562,255
31,732,532
33,574,147
33,574,147
34,521,352
35,363,704
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Consolidated balance sheet data:
Cash and cash equivalents
Working capital(3)
Total assets
Total long term liabilities
Total shareholders’ equity
2014
2015
As of December 31,
2016
(in thousands)
2017
2018
$
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
74,132
107,584
214,823
2,515
179,136
(1) Includes share-based compensation expense as follows:
2014
2015
Year Ended December 31,
2016
(in thousands)
2017
2018
Share-based compensation expense:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total share-based compensation expense
$
$
96 $
86
207
508
897 $
306 $
281
537
1,259
2,383 $
482 $
217
654
1,640
2,993 $
629 $
775
920
2,087
4,411 $
892
1,022
1,240
2,392
5,546
(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 year ended December 31, 2014.
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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.”
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.
Our results of operations will be adversely impacted by our failure to timely introduce new products, or to achieve market acceptance or gain adequate
market share for new or existing products.
Our ability to develop innovative new systems and products is important to our business strategy and competitive position. Difficulties or delays in
research, development, production or commercialization of new systems and products could adversely impact our sales and competitive position. 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. If we fail to develop and launch new systems and products, experience
cost overruns in connection with such development, or the market does not accept our new systems and products, our business, results of operations and
financial condition would be adversely affected. Even 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.
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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 might void 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, such
as M&R Printing Equipment, Inc., Machines Highest Mechatronic GmbH and S. Roque – Máquinas e Tecnologia Laser, S.A. 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 Company Ltd. and a number of smaller competitors with respect to our entry level system. Our competitors in
the Direct-to-Fabric (also known as R2R), or DTF, market include: Dover Corporation through its MS Printing Solutions S.r.l. subsidiary; Seiko Epson
Corporation through its subsidiary, Fratelli Robustelli S.r.l; Durst Phototechnik AG; Electronics for Imaging, Inc. through its Reggiani Macchine SpA
subsidiary; 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 DTF market gained their
current market position by merging with, or acquiring, existing companies in the DTF 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 direct-to-fabric 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.
Our move towards a higher proportion of direct sales in place of indirect sales may have adverse consequences.
Our go-to-market strategy consists of a hybrid model of indirect and direct sales. We continually evaluate that strategy in the geographies we serve in
an effort to best serve our direct or indirect customers. As a result of that evaluation, we have implemented, effective as of February 7, 2019, a full direct-to-
customer model in North America, and have terminated, as of that date, our Sales Representative Agreement with Hirsch International Corporation, or Hirsch,
our former primary distributor in the United States and Canada, which accounted for 18% and 15% of our revenues in the years ended December 31, 2017
and 2018, respectively. We also purchased related customer business assets from Hirsch at the time of termination of the distribution agreement. We may also
expand our implementation of direct sales in place of indirect sales in certain additional territories in the future. As we shift towards such a model, we may
experience an initial disruption to our sales efforts in those jurisdictions as we transition from our previous sales structure. In addition, a shift to a direct sales
model may result in a short-term impact on our results of operations, including due to the acquisition of inventory that might require a step up in basis and
other such accounting impacts and costs associated with increased headcount and related expenses. Moreover, the implementation of a direct sales model may
require significant management time and attention which could result in an adverse impact on our business and results of operations during the transition
period. There is no assurance that a direct sales approach will increase sales. We may be exposed to risks as a result of transitioning from an indirect sales
model to a direct sales model, such as difficulties maintaining relationships with specific customers, hiring appropriately trained personnel and ensuring
compliance with local product registration requirements, any of which could result in lower revenues than previously received from the distributors in that
market.
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A significant portion of our sales is concentrated among a small number of customers, and our business would be adversely affected by a decline in sales
to, or the loss of, those customers.
During the years ended December 31, 2017 and 2018, our ten largest customers accounted for approximately 55% and 54% of our revenues,
respectively. During those same years, Amazon Corporate LLC, a subsidiary of Amazon.com, Inc., which we collectively refer to as Amazon, accounted for
approximately 13% and 17% of our revenues, respectively. Given the concentration of our revenues with these customers, the loss of either Amazon or
another one of our significant customers, or variability in their order flows, could materially adversely affect our revenues or 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 quarters, 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.
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.
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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. The value of the
warrants depends, in part, on the price of our shares and their volatility, and the adverse impact of the warrants on our net revenues increases as
our share price increases. Accordingly, 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 and may cause fluctuations in our quarterly and
annual revenues, gross profit and operating profit.
● 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.
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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, or the manner in which investors or analysts assess and perceive our performance.
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.
● Certain parts of the control system of our systems are supplied by a sole supplier, Yaskawa Europe Technology Ltd., or Yaskawa. Our turn key
suppliers (Flex and Sanmina), which assemble the control system on our behalf, purchase those control system parts from Yaskawa. We also
purchase additional, spare control system parts from Yaskawa for our service department on a purchase order basis. Yaskawa maintains
additional inventory of these control system parts as safety stock for our benefit, based on our requirements.
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.
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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.
Our new Kiryat Gat facility is being constructed on lands leased by the Company from the Israel Lands Administration, or ILA. If we are unable to
continue to use such lands, we would be unable to use the facility and our results of operations and future prospects will suffer as a result.
In November 2018, we entered into a development agreement, which we refer to as the Development Agreement, with the ILA for the construction
of our new, modern, manufacturing facility in Kiryat Gat on lands leased from the ILA. Construction has begun and is currently expected to be completed by
2020. The Development Agreement provides that if the Company were a “foreign subject,” which includes the Company being under foreign control (i.e., a
majority of our ordinary shares are held by non-Israelis), this would constitute a fundamental breach under the agreement. We intend to follow a specific
standard process for seeking approval from the ILA in which the ILA approves our entering into the Development Agreement despite our potential status as a
“foreign subject,” since our shares are traded on NASDAQ, and we are held by multiple shareholders whose identities are unknown. However, should such
approval not be provided, the ILA would be entitled to terminate the Development Agreement if the Company is considered a “foreign subject” under the
terms of such agreement. If the Development Agreement were terminated, we would be unable to use the new Kiryat Gat facility being constructed on this
property pursuant to the Development Agreement, which would have a material adverse effect on our 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 (which we are in the process of replacing with a new, modern
facility being constructed). We also rely on contract manufacturing services provided by Flex Israel Ltd. and Sanmina-SCI Israel Medical Systems 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.
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.
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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.
Our operating results could decline in the near-term if we fail to execute on our growth strategies.
Our operating margin was 3.9% in 2018 and 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 $142.4 million in 2018. Our headcount increased from 251 as of December 31, 2014 to 444 as of December 31, 2018. 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 or
customers. 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.
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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. In the European marketplace, electrical and electronic equipment is required to comply with the Directive on Waste Electrical and
Electronic Equipment, or WEEE, which aims to prevent waste by encouraging reuse and recycling, and the Directive on Restriction of Use of Certain
Hazardous Substances, or RoHS, which restricts the use of ten hazardous substances in electrical and electronic products. Additionally, we are required to
comply with certain laws, regulations and directives 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.
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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 depreciated by 1.1%, 6.3% and 0.1% against the NIS in 2016, 2017 and 2018, respectively. During these periods, there was deflation in Israel of
0.2% in 2016, and inflation of 0.4% and 0.8% in 2017 and 2018, respectively. 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.”
In addition, a material portion of our leases are denominated in currencies other than the U.S. dollar, mainly in NIS. In accordance with a new lease
accounting standard, which became effective on January 1, 2019, the associated lease liabilities will be remeasured using the current exchange rate in future
reporting periods, which may result in material foreign exchange gains or losses. See Note 2, “Significant Accounting Policies”, to the consolidated financial
statements included in Item 18 of this annual report for more details.
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. Effective August 1, 2018, Gabi Seligsohn stepped down after four years as our Chief Executive Officer,
and was succeeded by Ronen Samuel. In addition, Nuriel Amir, our Chief Technology Officer since July 1, 2016, will no longer serve in that role at our
company, effective as of April 1, 2019. To the extent that we experience additional, frequent changes in our leadership team (or the leadership teams of our
subsidiaries) going forward, that could adversely affect our performance in a material manner.
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.
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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, or FCPA, the new European Union General Data Protection Regulation, or GDPR (which broadens the scope of personal privacy
laws to protect the rights of European Union citizens and requires organizations to report on data breaches promptly and obtain the consent of
individuals on how their data can be used), 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 that we have in place and/or 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.
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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.
As of December 31, 2018, we owned seventeen (17) issued patents in the United States and nineteen (19) provisional or pending U.S. patent
applications, along with thirty one (31) pending non-U.S. patent applications. We also had twelve (12) patents issued in non-U.S. jurisdictions, and eleven
(11) 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, Japan 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).
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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.
In September 2016, we filed an application with the European Union Intellectual Property Office (“EUIPO”) to register the “Kornit” trademark in
the European Union. In October 2016, Grupo FB Maquinaria, S.A. (“Grupo”) filed an opposition to our application on the premise that it was identical to an
earlier mark, and covered identical goods and/or services, as Grupo’s “Kornit” trademark. Grupo had filed an application to register its “Kornit” trademark in
January 2016. We believe that the opposition is meritless and filed an application with EUIPO in July 2017 to declare the Grupo’s registration of the “Kornit”
trademark invalid on the basis that the registration was done in bad faith. We are awaiting a ruling by the EUIPO and there can be no assurance that we will
prevail. If the EUIPO denies our application to register the “Kornit” trademark, we could be forced to stop using the trademark in the European Union or
enter into a license agreement with Grupo to use the mark, which could adversely impact our brand recognition in the European Union and our results of
operations.
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.
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.
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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.
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.
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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.
We may be subject to additional tax liabilities in the future as a result of audits of our tax returns.
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. We are currently subject to a tax audit for the years 2013 to 2016 by the Israeli Tax Authority, or ITA. The ITA may disagree
with our positions taken in our tax returns for these years and we may be subject to additional tax liabilities, which could have a material adverse effect on our
results of operations.
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 $23.90 and as low as $8.10 through March 15, 2019. 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;
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● 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.
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.”
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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.
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.
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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. We may lose the status of an emerging growth company as of the end of 2019 as a result of the enhanced market value of our shares held by
public shareholders following Fortissimo’s sale of its shares in our company, which may make us a “large accelerated filer” as of that time. 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.
In January 2017, May 2017 and December 2018, Fortissimo Capital resold ordinary shares into the public market, via underwritten offerings that
were effected pursuant to its registration rights, following which it no longer holds any ordinary shares. An additional security holder – Amazon – is also
entitled to certain registration rights under the U.S. Securities Act of 1933, effective as of January 10, 2018, in respect of the resale of the ordinary shares
underlying the warrants that it holds. 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, 2018, options to purchase 619,711 ordinary shares granted to employees and office holders were vested and exercisable and
22,597 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, 2018 there were options to purchase 1,583,564 shares and 414,420 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.
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, but may need to obtain that in the near future, which may require enhanced actions on our part
that we may not successfully implement.
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 (which, as discussed above, may occur as of the end of 2019), 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.
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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 2018 and we do not expect that we will be classified as a PFIC for the taxable year ending December 31, 2019.
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 2019 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.”
Certain U.S. holders of our ordinary 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. Shareholders”). Generally, a 10% U.S. Shareholder of a CFC
is 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 Cuts and Jobs Act of 2017, or 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.
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 adverse 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. We have taken steps with the assistance of
external tax consultants to prevent our subsidiaries from being treated as CFCs subsidiaries and it is not expected that any of the subsidiaries will be treated as
CFCs.
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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, 2018, we had 277
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.
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 2019. 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 is currently set as 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.”
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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.
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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.
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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 in the years ended December 31, 2017 and 2018 were principally used for the purchase of property, plant and equipment ($5.7
million and $7.3 million in 2017 and 2018, respectively), including $1.8 million, in the aggregate invested over the course of those two years towards our
now-complete, new headquarters in the United States. On February 7, 2019, we consummated an asset purchase from Hirsch Solutions Inc., our primary
distributor in the United States and Canada, which accounted for 21%, 18% and 15% of our revenues in the years ended December 31, 2016, 2017 and 2018,
respectively, to purchase remaining Kornit business assets related to the distribution agreement between the companies. On the closing date, our company,
through our wholly owned subsidiary Kornit Digital North America Inc., took ownership of relevant Kornit-related customer business assets as well as
remaining inventory of systems and ink. Under the related acquisition agreement, the total consideration was $4.7 million. Our current capital expenditures
relate primarily to our manufacturing facility for our ink and other consumables in Kiryat Gat, Israel. We are financing the construction of that facility from
cash on hand.
Capital expenditures in the year ended December 31, 2016 for purchase of property, plant and equipment, and the digital direct to garment printing
assets of SPSI Inc. (which were acquired in July 2016), were $14.7 million, in the aggregate.
B. Business Overview
Industry Overview
The General Textile Industry
Textile is a flexible material formed using various processes, including weaving, knitting, crocheting or felting. This material may be used for
manufacturing a broad range of conventional as well as advanced, finished goods, which may be broadly categorized (as related to the focus of our business)
into fashion, apparel, home decoration and soft signage applications. According to a report published by Marketline in December 2018, the value of the global
apparel retail market totaled $1.4 trillion in 2017. The compound annual growth rate (CAGR) of the market was 4.4% between 2013 and 2017. The global
apparel retail market is forecast to reach $1.8 trillion in 2022, an increase of 29.7% since 2017, reflecting a CAGR of 5.3%. Rising disposable income,
urbanization and population growth in emerging economies is expected to play an important role in improving the lifestyle of consumers, which is expected
to drive the demand for textile products.
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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 (as related to the focus of our business) fashion, apparel, home decoration and soft signage applications. According
to The Future of Digital Textile Printing report published by Pira in 2019, approximately 95% of the global output of printed textile in 2018 was carried out
via analogue methods of printing. According to the same Pira report, the global value of digital printed textile output was estimated to be approximately $3.2
billion in 2018 and is expected to grow to approximately $5.5 billion by 2023, reflecting a CAGR of 11.6% in the five-year period from 2018 to 2023.
According to the same Pira report, digital textile output volume was estimated to be approximately 2.2 billion square meters in 2018 and is expected to reach
4.1 billion square meters in 2023, reflecting a CAGR of 13.4% for the five-year period from 2018 to 2023. Pira estimates that global digital printed textile
output constituted less than 5% of the total global printed textile output in 2018.
Mega Trends Affecting Our Industry
Industry 4.0
Digitization of manufacturing is transforming the way products are being produced. This transformation process is also broadly referred to as
Industry 4.0, representing the fourth industrial revolution occurring in manufacturing. This fourth industrial revolution is mainly about full digitization and
the move away from analogue production methods, as well as cloud networks connectivity, and the introduction of autonomous systems fueled by data and
machine learning. As a result of the support of machines that keep getting smarter as they get access to more data, the increased use of affordable robotics in
production environments, and the data-connected logistics supply chain, our future factories are predicted to become more efficient, productive and less
wasteful. The fashion and apparel industry segments in which we operate have been operating for decades in traditional, analogue and labor-intensive models,
which will yield to what can also be referred to as Textile 4.0.
E-Commerce Boom
E-commerce has grown globally at an unprecedented rate and is transforming retailing, across industries. Around the world, e-commerce is entirely
changing the way people shop. In the major consumer markets of Europe, the U.S. and China, e-commerce is fast trending towards becoming the preferred
shopping method for many people. Having access to global shopping opportunities allows consumers to save time, save money and have access to greater
choices. E-commerce giants and technology vendors continue to invest in advanced technologies such as virtual reality, 3D modeling, augmented reality, and
artificial intelligence in a continuous effort to improve the online shopping experience. Goldman Sachs estimated in a research report dated September 5,
2018 that the global ecommerce market (excluding travel) was worth approximately US $2 trillion in 2018, with a projected year-over-year CAGR of +20%
until 2021. According to the same report, e-commerce was estimated to represent approximately 20.7%, 12.2%, and 9.4% of all retail sales in 2018 in China,
the U.S. and Western Europe, respectively.
According to a global consumer survey performed by The Nilsen Company in 2018, fashion and apparel are, together, one of the top segments in
ecommerce retail, predicted (according to a study published by Statista, the Statistics Portal) to increase at a compound annual rate of 10.6% from $408
billion in 2017 to more than $706 billion by 2022, as brands and retailers continue to adopt digital technologies that offer highly relevant and personalized
customer experiences.
Traditional Retail Meltdown
For the last decade, various factors have resulted in the shrinking, bankruptcy/reorganization or total closing of numerous traditional North American
retailers. Announcements from major retailers of plans to either discontinue or greatly scale back their retail presence continued in 2018 and into 2019. For
example, Sears Holdings filed for bankruptcy protection in October 2018, J.C Penney has been closing stores, including in 2019, and Payless Shoesource has
announced plans to close all of its stores in 2019. Credit Suisse, a major global financial services company, predicted that 25% of U.S. malls that remained in
business in 2017 could close by 2022. According to a research report published by Goldman Sachs on September 5, 2018, approximately 27% of announced
store closures in 2018 were in the apparel and accessories categories. The primary factors affecting the continued closing of traditional retail stores are the
shift in consumer habits towards online shopping, a less than inspiring shopping experience at traditional brick-and-mortar stores, retailers’ inability to sell
trend-right apparel, and the ongoing pile-up of unsold inventory, which has put pressure on profits. Traditional retailers are struggling to find the right balance
between supply and demand, so that they do not end up with too much inventory on their shelves or in stock rooms. When merchandise piles too high,
traditional retailers are forced to use steep discounts to deplete inventory and make room for next season’s goods. Further, e-commerce share gains continue
to put pressure on traditional retail stores that are finding it difficult to compete with the level of selection, price, service, and convenience provided by many
of the pure-play e-commerce companies or omni-channel retailers.
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Social Media Platforms
Social platforms, historically categorized into media and networks (which categories have merged in recent years), have changed the industrial and
business landscape, both for companies that have adopted them and for those that have not. Social media platforms have an extremely powerful impact on the
ways in which individuals and organizations are communicating with each other, and a powerful impact on consumer trends, demand and brands perception.
This mainstream effect has a dramatic impact on the ability of small and micro brands, some of which are initiated by individuals or organizations that are
leveraging their social influence status to inspire individuals who, in turn, purchase those brands’ products, to achieve ultra-fast recognition and exponential
growth at the expense of traditional players, which need to develop agility in order to connect with consumers.
Sustainability
The need to reduce or contain the ecological footprint of the textile industry is affecting the entire industrial system. The urgency for change has
flowed through from political and environmental activists and scientists, into mainstream government regulators and business leadership across the globe. A
sustainable industrial system requires formulation of new strategies and thinking, integrated into business and operational frameworks around sustainable
manufacturing, supply chain design, sustainability performance measurement and ongoing management. Industry is now considered not only part of the
problem but also part of the solution. From a practical point of view, as it comes to sustainability strategies, companies are focused on technology
improvements enabling cleaner production, pollution prevention, and other sustainable manufacturing practices. Considering the size of the textile industry—
one of the largest in the world—sustainability of the industry is important, but, on top of that, companies can furthermore make a huge difference
environmentally, economically and socially. The textile industry has many reasons to place an emphasis on sustainability, including reduced costs, protection
of the environment and sustained goodwill from its customers for eco-friendly practices. As one of the world’s most water and air polluting industries,
sustainability issues in the textile/apparel industry continue to receive great attention.
Mega Consumer Trends Affecting our Industry
Personal Expression
We believe that modern consumers, impacted by the mega industry trends, are increasingly seeking the ability to express their identities and beliefs
through the everyday choices that they make. If in the past it was mainly about the choice of brand affiliation that was considered “appropriate” for their self-
image, consumers are now seeking new and creative ways to express their identities through unique, customized or personalized impressions, styles, and
messages – whether affiliated with their favorite brands, through the creation of their own “private brands” or via affiliation with unique “no brand” designed
goods. Younger consumers are more and more concerned with social and environmental causes, as many increasingly back their beliefs with their tightly
coupled expression and consumption habits, favoring goods and brands that are aligned with their personal, social and environmental values and avoiding
those that do not.
Instant Gratification
Modern consumers seek solutions faster and easier than ever before, catalyzed by the explosive growth of technology and mobile applications usage.
This shift has given way to an on-demand economy where immediate gratification has become the standard across industries, in the form of instant arrival
rides in the transportation industry, unlimited on-demand video streaming, minimal wait time for food deliveries, or in the case of retail, instant visibility and
availability of product and inventory, and ultra-fast delivery. Consumers expect to be serviced almost instantaneously and are rewarding the brands that
understand and meet their instant gratification needs. According to a 2018 report published by Internet Retailer, 66.8% of the top 1,000 retailers in North
America offer free shipping and 55.6% offer the option to pay for next-day delivery. A recent study published by Consumer Intelligence Research Partners in
January 2019 estimated that the number of Amazon customers in the United States willing to pay more to receive products faster, through its Amazon Prime
service, exceeded 100 million as of December 2018. This change in consumer behavior is causing retailers to evaluate ways to alter their approach towards
their entire supply chain, with high focus on improved inventory management and an efficient and scalable fulfillment infrastructure. In addition to retooling
their internal fulfillment capabilities, many retail brands have begun to leverage the capacity of third-party online stores to meet customer demands for
delivery speed and product availability.
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Social Media Influence
With the rise of mega social platforms like YouTube and Instagram, and fueled by the explosive mobile device accessibility, influencer marketing
continues making waves on social media and narrowing the bridge between discovery, inspiration and purchase. According to a 2017 millennial survey
published by Dealspotr in 2017, most of today’s consumers are likely to find inspiration from external sources rather than directly from a brand or retailer,
and approximately 41% stated that they rely on social influencers and bloggers. According to another recent study conducted (the Robin Report by Catherine
Schetting Salfino), 55% of millennials say that they are less loyal to apparel brands now than they were a few years ago. More than 1 in 5 say social media
sites are the first places to which they go to get clothing ideas, a figure that jumps to 36% among those aged 13-to-25 and climbs to 46% among millennials
aged 22-to-37.
“Be Greener”
Environmental degradation has been hitting headlines in recent years. News articles and documentaries around rising seas, declining air quality and
shrinking animal populations have become more commonplace. Sales of reusable coffee cups and water bottles took off, plastic straws were banned in many
bars and restaurants, and mega consumer brands like Evian and Coca-Cola have committed to manufacture from recycled materials. The impulse to “be
greener” is clearly gaining momentum. According to a recent bespoke study carried out in the UK and U.S. by Globalwebindex, half of the digital consumers
surveyed said environmental concerns impact their purchasing decisions. Millennials are the ones driving the sustainable movement with their lifestyle and
behavioral changes. Often coined as the “green generation”, many brands are starting to see the appeal of, and the opportunity to connect with their
consumers through, these changes, rather than viewing the changes as a regulatory burden. According to the Globalwebindex study, 60% of millennials aged
22-35 said that they would be more likely than any other generation to pay extra for ecofriendly or sustainable products. With plastic waste currently at the
center stage of consumers’ attention, it is likely just a matter of time before consumers better research the manufacturing processes and decoration techniques
for their clothes, shoes and bags before buying them, which will increase pressure on brands to connect with the consumer by adopting eco-friendly printing
and decoration methods that minimize water pollution, toxic chemicals use and other textile waste.
Implications on Fashion and Apparel Transformation, as it Relates to our Business
Regardless of size and specific segment, industry players in fashion and apparel, whether traditional brands, digital start-ups, new generation e-
tailers, or different forms of customized designers, now need to be nimble, think digital-first and achieve ever-faster speed to market. They need to connect to
the end consumer for self-expression, take an active stance on social issues, satisfy consumer demands for ultra-transparency and sustainability, and ensure
that they invest in an omni-channel strategy, thereby enhancing their manufacturing productivity, supply chain resilience and their ability to respond to the
immediate gratification needs of the evolving consumer. Traditional brands are beginning to self-disrupt their own business models, image and offering in
response to the new breed of emerging high growth online-first brands that are accelerating, thanks to changing consumer preferences, decreasing brand
loyalty, growing appetite for self-expression, and instant gratification. We expect more traditional brands to follow suit on this omni-channel path of self-
disruption, which will have a significant impact on their ability to connect with, and meet the needs of, consumers. In a recent survey conducted by a leading
management consulting firm, top industry executives were asked to describe the words that best describe the industry, with the top three words being:
“Changing”, “Digital”, and “Fast”.
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We believe that the following objectives capture some of the key areas of focus, as they relate to our business, as traditional and new generation
online-first fashion and apparel players continue to adapt their value propositions and operating models to the rapidly changing industry environment and
consumer preferences. We believe that these industry areas of focus will continue to fuel the growing need and demand for our innovative digital textile
printing solutions:
● Connect with consumers need for self-expression via unique graphical and text designs
● Capture the moment, by shortening the time from inspiration and design to market
● Offer “unlimited” variety and availability in their virtual and traditional storefronts
● Connect with consumers via personalization and customization offerings
● Respond to the sustainability demands of consumers and regulators
● Respond to consumers’ immediate gratification needs
Impact on the Industry Need and Demand for Operational Transformation
New generation start-up apparel and fashion businesses born and grown in digital and online retail and production, some of which are existing
customers of our solutions, have already implemented successful full or partial on-demand production models as they establish their greenfield environments.
We expect these businesses to continue scaling and perfecting their existing digital business and operational models, investing in front-end technologies to
continue improving the online customer experience, and operationally scaling their partial or full on-demand production capabilities.
We believe that in order to address the focus areas identified above, traditional industry and brands players will continue to examine and transform
their predominantly mass production and inefficient analogue operating production models and supply chains, especially as it comes to managing their
finished goods inventory levels, which remains a huge financial risk. Traditional companies have continued to invest “upstream the chain” in better predicting
buying trends, consumer preferences, and demand via sophisticated big-data analytics, as they plan their collections and inventory levels; however, consumer
demand is more volatile and difficult to predict than ever. The challenge with prediction-only production planning is growing, and industry executives, as
evidenced in a 2018 study published by a leading management consulting firm, are increasingly shifting their focus “downstream” to the manufacturing
environment, seeking a shift to a more agile, partial or full on-demand production model. We believe that industry players will continue to seek ways to adopt
major changes to their business and operational models, and supply chains, and— specifically as it relates to our business— in how they design, produce, and
decorate garments and apparel.
The below lists a few key production gaps, that prevent a successful transition to partial or full on-demand retailing models, that traditional fashion
and apparel manufacturers are looking to close as they plan their future marketing and production strategies:
Mass Customization and Personalization: The capability to manufacture a relatively high volume of product options, carrying unique designs,
without tradeoffs in cost, delivery and quality. In a simplified way, the ability to cater demand to mass produce customizable products with unlimited designs,
on a one-by-one basis, in a cost-efficient manner.
“Shorter Runs”: Mass production of smaller batches with (most likely) higher number of order amounts, at a similar cost per garment structure
achieved by producing large batches. This flexibility reduces finished goods inventory risks by identifying buying patterns and responding to demand in a
more accurate manner by replenishing stock in ultra-short cycles. The pressure for smaller batch sizes and on-demand replenishment is driven partly by
profitability, but also by a desire for sustainability.
Proximity Production, Proximity Decoration and Nearshoring: Two decades ago, U.S. and European mass-market apparel brands and retailers
shifted production to Asia to gain a cost advantage. Factors are changing this calculus by making it critical for companies to bring new styles to market more
quickly and switch out lines mid-season. According to a recent 2018 survey published by a leading management consulting firm, 54% of purchasing
managers surveyed in the US and the EU said that proximity to customers is becoming more important. In another study published by a leading management
consulting firm, 60% of apparel procurement executives said that they expect that over 20% of their sourcing volume will be from nearshore by 2025. In
addition, rising wages for factory workers across Asia mean that production in Asia is less cost-efficient than it used to be. The real prize is shorter lead times.
By reducing time-to-market, companies can produce, partially produce, finish, print or decorate more closely in-line with demand, reducing overstocks and
increasing full-price sell-through.
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Microfactories, Speedfactories, Reshoring: Smaller and nimble manufacturing sites, usually planned out in an urban cell model, that can efficiently
source or produce the raw materials as well as produce and ship finished apparel goods end-to-end. Success of such factories is heavily reliant on a fully
digital, real-estate efficient, either semi or fully automated manufacturing workflow capability that offsets the inefficient cost structure associated with large
analogue equipment, rising costs of real-estate and labor costs, predominantly in developed countries.
We believe that the technology and solutions that we bring to the market in the form of digital textile printing solutions, as listed in our products and
technology sections, are key enablers for these business and operating models. We expect increasing demand and adoption of our solutions by start-ups and
new-generation digital apparel brands (some of which are our customers), as well as from traditional apparel brands that need to adapt their operational
models in order to remain connected with their customers.
Overview of Textile Printing Processes
The graphic and accompanying description below present various textile 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:
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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 diagram 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
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.
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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:
Direct-to-Fabric (DTF) In DTF 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 DTF 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.
How Digital Textile Printing Addresses the Industry Needs
The following characteristics of digital textile printing enable new business and operating models, help industry players as they address their
manufacturing gaps, and, as these characteristics relate to our business, 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 short runs, with personalization
capabilities, in a cost-effective manner with a minimum order quantity of one unit. 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 design before
printing.
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.
Integration with advanced workflow environments: Digital textile printing is better suited for transition to full digitization of the production floor
environment, including connectivity to cloud networking elements and productivity analytics software solutions.
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.
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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 reduces working capital requirements, thereby enabling the emergence of numerous online businesses which are focused on
the sale 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 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.
Sustainability: 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.
Our Business
We develop, design and market innovative digital printing solutions for the global printed textile industry, with a major focus on the fashion, apparel
and home décor segments of the industry.
Our vision is to create a world where everybody can bond, design and express their identities, one impression at a time.
Our mission is to revolutionize the fast-changing industry by facilitating and expediting the transition from analog processes that have not evolved
for decades and are not fit for the rapidly changing business models and self-disruption needs of the industry, to digital methods of garment, apparel and home
decor finished goods production and decoration that address the contemporary supply, demand, social and environmental needs of the industry in which we
operate.
We focus on the rapidly growing high throughput, direct-to-garment, or DTG, and Direct-to-Fabric, or DTF, segments of the printed and decorated
textile industry. Our solutions include our proprietary digital printing systems, ink and other consumables, associated software and value-added services that
allow for quality and cost-effective large-scale printing of short runs of complex images and designs directly on finished garments and fabrics. Our solutions
address the growing production gaps reflected in the need to shift to shorter runs, proximity production, proximity decoration, partial or full on-demand
production, and microfactory models by enabling our customers to print and decorate high quality products in a time efficient, cost-effective and
environmentally-friendly manner. This allows textile manufacturers to transition from their traditional business and operating models of supply based on
demand predictions, to partial or full on-demand or made-to-order models, by which decoration of fabric and production of finished goods only takes place
once a customer order has been issued.
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 industry, as further described in our “Industry Overview” section above.
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The success of evolving omni-channel apparel retail is dependent heavily on the ability to show a large variety of designs. Since it is more and more
difficult to predict consumer preferences and demand, it is increasingly difficult to stock every possible design. Having digital capacity available allows
printers, brands and retailers to offer unlimited design with minimal to no inventory risk. We believe we are well positioned to continue taking advantage of
this trend.
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, industrial and mass production DTG solutions are suited to the needs of a variety
of customers, from smaller industrial operators with limited budgets to mass producers with 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 order to production workflows in the printing process, by offering
a complete solution from web and traditional order intake through graphic job preparation and execution. We also offer customers maintenance and support
services, as well as value-added services and application consulting, aimed at optimizing the number of impressions printed by our systems.
Building on the expertise and capabilities that we have accumulated in developing and offering differentiated solutions for the industrial DTG
market, we also market an industrial digital printing solution, the Allegro, which targets the on-demand DTF market. While the DTG market generally
involves printing on finished garments, the DTF 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 industrial DTF digital textile printing solution available on the market. We primarily market the Allegro to
innovative web-based businesses operating on-demand business models 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, 2018, had more than 1,200 customers globally. As of
December 31, 2018, we had 444 employees located across four regions: Israel, America, Europe and Asia Pacific. In the year ended December 31, 2018, we
generated revenues of $142.4 million, representing an increase of 24.8% over the prior fiscal year. In the year ended December 31, 2018, we generated 57.2%
of our revenues from the Americas region, 31.8% from the Europe, Middle East and Asia (“EMEA”) region, and 11% from the Asia Pacific region.
Our Competitive Strengths
The following are our key competitive strengths:
Leading player in the fast-growing industrial digital DTG market.
We are the leading player in the fast-growing, industrial and mass production, digital DTG market based on our sales, and have more than 1,200
customers globally. We have been revolutionizing the industry since 2005 and have developed a robust solutions portfolio and scaled our go-to-market
infrastructure over the course of this period. Other than our unique intellectual property and technology, and our robust go-to-market infrastructure, our
application experts have the best industry knowledge. Consequently, we believe we can greatly support and advise our existing and future customers with the
best-known methods to optimize their production environments. Our own internal estimates, based on our understanding of the industry, combined with data
from available market reports on the estimated production quantities of garments, are that approximately 15 billion impressions were printed direct-to-
garment in 2017 in the global apparel industry, including the decoration of, among other forms of garments, T-shirts, jerseys, and trousers. We estimate the
number of annual impressions to grow to approximately 25 billion on an annualized run-rate basis, by the end of 2023. We estimate that only 1 to 2% of these
impressions are printed digitally today. We therefore believe that our leadership position, combined with continued technology innovation, and operational
improvements, will allow us to grow our business in the coming years.
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Well-positioned to disrupt the DTF market with our unique single-step manufacturing solution. We believe we are well positioned to capitalize
on the growing trend toward on-demand home décor with our unique DTF 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 do not have a vertically- integrated textile mill. Unlike
other digital textile printers, the Allegro does not require multiple pre-processing and post-processing steps that are customarily used in vertically integrated
textile mills and that 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, 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 DTF
digital printing require dedication of discrete printers to specific fabric types.
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 and operational models by enabling them to produce short to medium runs of high-quality
customized garments efficiently. This facilitates online business models that require an on-demand and made-to-order basis and allows brand owners to
produce and decorate garments in-house. With a constantly growing worldwide customer base of approximately 1,200 customers, we are witnessing the
creation of a global fulfillment network of printing specialists that 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 print more impressions, 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 industrial and mass
production 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 271 as
of December 31, 2018, 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, 2018.
We anticipate revenue from services to increase over time as we reach upgrade cycles across our growing installed base and continue to expand our service
contracts business model. Additionally, sales of ink and other consumables are generally higher in high throughput systems such as the Vulcan, Atlas,
Avalanche and Allegro systems. Large customers typically run at high utilization rates and can consume up to five times as much ink per year compared to
other customers. 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.
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 system utilization and on-going capital investments in our equipment through the depreciation cycle.
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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 29 issued patents and 19 provisional or pending US applications, 31 pending non-US
patent applications and 11 pending PCT applications that cover wet-on-wet printing methodology, ink formulations, printing processes and related methods
and systems. Our team of over 115 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 complex needs. Since 2015, we have commercialized four new
solutions in the market: the Allegro, a one-step, integrated DTF printing, drying and curing system, the Vulcan, a cost-effective digital substitution for
carousel screen printing, the HD family of solutions, and the Atlas, our recently introduced high throughput mass production digital DTG system. 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.
At the heart of a true industrial revolution, or Textile 4.0. 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 runs of production.
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, Ronen Samuel, and our Chief Financial Officer, Guy Avidan, bring extensive experience of
managing publicly traded companies and/or in management roles in the printing industry. Our management team’s industry expertise and extensive
experience in running global 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 public organizations including Intel, HP, NICE,
Amdocs and Stratasys. Over the past five years, we have also invested heavily in human resources to support our growth. Since 2013, our workforce has more
than doubled from 190 to 444 as of December 31, 2018. Additionally, more than 167 of our employees are in the field, enabling us to provide more localized
service to our customers.
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Our Strategy and Catalysts for Growth
The following are the key elements of our growth strategy and catalysts that will drive our business expansion:
Remove market and technology barriers to drive continued organic growth.
We are focused on ongoing investments in our research and development, product management, and applications development areas to continue
driving innovation within the industry, thereby allowing our customers and prospects to grow their businesses by enabling them to expand their product
offering with additional applications, designs, and fabric types. We focus on constantly removing barriers as they relate to quality, hand feel, and cost (as
evidenced in the release of our latest HD family of solutions). We will continue to drive the productivity of our technology to allow existing and future
customers to cost effectively obtain new jobs and transfer existing recurring jobs and impressions from analog to digital printing, which will drive increased
sales of systems, consumables and services. As part of our strategy, we will continue to bring to the market solutions that enable efficient mass production and
customization in a rapidly transforming industry that is shifting to shorter production runs and mass production of on-demand, at times one-by-one, orders.
We believe that removing market barriers includes periodically introducing to the market innovative digital processes that address key industry pain points
and gaps, which traditional analogue techniques cannot handle, do so with poor quality, or do so in a non-cost efficient manner. We believe that continuing to
remove market and technology barriers and developing new features and functionality of our solutions will allow us to win new customers and increase
system, consumables and services sales to existing customers.
Enter Key Adjacent Markets.
We plan to continue growing our customer base by targeting new customers in markets that are adjacent to the markets in which we have been
operating. To date, we have been catering predominantly to the customized design market, consisting of online businesses of different sizes, focused mainly
on mass customization and personalization that are enabled by using our technology. An example of our success in this market is the Master Purchase
Agreement, that we entered into 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 under the agreement. During the years 2017 and 2018, Amazon related revenues
were $14.4 million and $24.2 million, respectively. We expect that our relationship with Amazon will continue to expand in the future and that they will
remain a significant customer. We expect continued growth with other existing customers in the customized design market as they seek to grow capacity,
provide new applications and expand into new market segments and geographies. We also expect to add new customers in the customized design market, as
the market continues to grow and develop. With the breadth of our existing portfolio and our continued investment in features and functionality, we believe
we are well positioned to expand our market reach by penetrating adjacent markets in the form of traditional and start-up brands, private labels, and the
promotional market, in which we can drive adoption of digital DTG printing solutions in place of analogue screen-printing production methods, which are
currently primarily relied upon. While we have started to penetrate these markets, directly or via third-party fulfillers and decorators, we plan to deepen our
penetration into these important markets as they seek to transform their business and operating models.
Maximize system utilization by 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 value-added services, offering a customer empowerment program
inclusive of basic and advanced training, with a goal of enabling our customers to increase utilization of their systems. 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 objective is to
help customers operate their businesses more efficiently, print more impressions and increase utilization of their systems, thereby requiring more ink and
other consumables purchases as well as potential investment in new systems as they require additional capacity.
Expanding our GTM and services business.
We continue to invest in our go-to-market infrastructure across geographies, including in our sales, applications, and services teams. While
maintaining an overall hybrid go-to-market strategy that includes both indirect and direct sales, we have adopted a direct sales model in North America and
are assessing moving towards that model in one or more additional key markets. In North America, we initiated the transition towards direct sales via our
acquisition of the U.S.-based digital DTG printing assets of SPSI in 2016, in which we acquired an increasing number of larger accounts, which require a
more direct relationship between our company and the related customers. We completed the transition in North America to a full direct sales model in
February 2019, with our acquisition of customer business assets from Hirsch, our former primary distributor in the United States and Canada. By fostering
direct sales relationships with our North American customers, we aim to deepen our relationship with them as well as better align our product roadmap to
meet their needs.
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Strategic accounts are an important and valued part of our business and future growth, and we continue to make the appropriate investments in
ensuring we serve their needs when it comes to sales, application consulting and services support. We expect to continue developing our strategic accounts
practice in a combination of dedicated regional and corporate resources as we strive to help these important customers improve their business performances
by delivering best-in-class customer experience.
We are seeking to increase the number of customers that rely on us to provide services for their systems by expanding our service capabilities and
driving adoption of our portfolio of services contracts. As of December 31, 2018, we had service contracts in place with approximately 26% of our industrial
and mass production installed base. Service revenues exceeded 10% of our overall revenues for the first time in 2017, and, in 2018, amounted to $16.6
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 and growth in the number of impressions
printed, expanding the variety of print applications and increasing sales of post-warranty service contracts and other professional application development
services.
Extend our leadership position through acquisitions and strategic partnerships.
We seek to continue to differentiate ourselves and extend our leadership position. From time to time, we may supplement our internal efforts with
complementary inorganic initiatives such as acquisitions and strategic partnerships to enhance our positioning. For example, our acquisition of Polymeric
Imaging in 2015 expanded our ink technology capabilities, our acquisitions of the digital DTG printing assets of SPSI in 2016 enabled us to strengthen our
direct sales channel and gain access to a large screen-printing customer base, and the acquisition of business assets from Hirsch in 2019 helped us transition to
a full direct sales model in North America. 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.
Our Products
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, print engine, printing throughput and process ink colors, as well as other customizable features. We categorize our DTG systems into a few
main category groups: Entry Level, Industrial, and Mass Production. We also intend to increase our portfolio in the near future with a specialty category. As
our business and marketplace has evolved, we have shifted the mix of our system sales primarily to higher throughput systems:
Entry Level DTG: 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 DTG: We offer a wide range of industrial high throughput systems. 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 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, thereby 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.
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During 2018, we introduced our new HD technology into our industrial portfolio, based on a newly developed printing engine and ink-set. This new
technology was specifically designed to achieve superior printing quality with lower ink laydown, resulting in lower cost-per-print and better overall cost of
ownership to our customers. The HD technology is offered in the Storm platform in a hexa configuration (Storm HD6) and in the Avalanche platform in two
configurations of hexa color and CMYK (Avalanche HD6 and Avalanche HDK). In alignment with our products upgrade strategy, an upgrade path from
existing installed systems was also added to our product offering, enabling our customers to improve cost of ownership on their existing systems and allowing
us to gain revenues from our existing installed base. The unique capabilities of the HD technology, in print quality and cost per print, and its availability on
our two main industrial platforms, serve our strategy of screen-printing replacement, as it will allow us to penetrate screen printing accounts of different sizes
and a variety of needs.
Mass Production DTG: During 2016, we commercially launched our new high throughput platform, the Vulcan, which is geared towards addressing
the needs of mass production at higher printing speeds and volumes and at a significantly lower cost per print. In the beginning of 2019, we launched our
newest DTG platform – the Kornit Atlas. The Atlas represents our next generation direct-to-garment printing platform, equipped with our next generation HD
technology and designed mainly for high-volume garment decoration businesses and mid-to-large size screen printers. With its retail-grade print quality, high
productivity and attractive total cost of ownership, the Atlas will allow our customers to serve additional market needs and open new opportunities.
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.
Direct-to-Fabric (DTF): Our Allegro system is the first DTF printing system to allow for one-step DTF 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, most DTF 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. Most 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 $69,000 to over $820,000 and consume an average of $5,000 to $300,000 of ink and consumables annually per
system.
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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, viscose, lycra and various blends, 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 lucrative athleisure market.
System
Breeze
Storm II
Storm 1000
Storm Hexa
Storm HD6
Storm Duo
Avalanche
Avalanche DC Pro
Avalanche 1000
Avalanche Hexa
Avalanche HDK
Avalanche HD6
Atlas
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
High Throughput
High Throughput
High Throughput
High Throughput
Effective Throughput
Light/Dark Garments(1)
32/25
120/65
170/85
170/85
70/55(2)
190/N.A
150/100
150/100
220/160
180/140
105/85(2)
105/85(2)
200/160(2)
120/120
250/250
Colors
CMYK + White
CMYK + White
CMYK + White
CMYKRG + White
CMYKRG + White
CMYK + White
CMYK + White
CMYK + White + Discharge ink
CMYK + White
CMYKRG + White
CMYK + White
CMYKRG + 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
20 x 28 in
23.5 x 35 in
23.5 x 35 in
23.5 x 35 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
15.5 x 19.5 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.
(2) Measurement method changed to 13''x13'' image impression instead of A4.
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 seven 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 close to 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.
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Software Solutions
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.
Some of our customers also purchase our QuickP Designer 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.
In 2018 we introduced to market a new professional RIP software specifically designed in full collaboration with ColorGate. This new offering
allows our customers to enhance our systems’ performance in the areas of print quality and color management, allowing them to achieve superior results and
manage high-end color demanding applications. The combination of this new product offering, together with our HD technology, also serves our screen-
printing replacement strategy, allowing our customers to achieve color accuracy and matching to screen prints.
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, 2018, we had service contracts in place with approximately 26%
of our industrial and mass production installed base. Service revenues exceeded 10% of our overall revenues for the first time in 2017 and, in 2018, amounted
to $16.6 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.
Maintenance and Support
During 2018, we provided a 12-month warranty on our systems, which covers parts, labor and remote support. Our customers can also purchase an
additional year of service and support 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, maintenance, software release and
onsite yearly maintenance, or they can choose to rely on our support on a non-contractual time and materials basis. In the United States, we provide
maintenance and support directly to our customers. In the EMEA region, 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.
Professional Services
Our systems are designed such that customers can operate them without the assistance of our company or 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 recently launched our Customer Empowerment Plan
that emphasizes knowledge-transfer to our customers. We have furthermore established three training centers at our regional offices that are aimed at
familiarizing customers with their systems by obtaining access to online training and documentation, and by getting to know important operation,
maintenance and application procedures by attending technical and application training in our training center. We provide professional services to customers
in all regions, both in person and through advanced web-based learning systems.
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Our Customers
Our diverse global customer base consisted of more than 1,200 customers as of December 31, 2018. Throughout our growing installed base, our
customers can 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 that we currently serve includes:
Self-Fulfillment. Companies manufacturing and selling their own designs that are advertised on their own websites and through other marketing
means.
Hybrid Printers. Companies that 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.
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.”
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.
D. Property, Plant and Equipment
Our corporate headquarters are located in Rosh Ha’Ayin, Israel in an office and research and development facility consisting of approximately
83,000 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 19,000 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 has begun in January 2019
and is expected 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 new U.S. headquarters are located in Englewood, New Jersey. We have entered into a lease for these headquarters, which are comprised of
approximately 15,845 square feet of offices and warehouse. The lease for this location expires in February 2028. We also maintain a smaller office in
Mequon, Wisconsin, which was the location of our U.S. headquarters prior to their relocation to New Jersey. We maintain additional sales, support and
marketing offices in Dusseldorf, Hong Kong and Shanghai.
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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, 2018 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 DTF 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.
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 DTF market. While the DTG market generally involves printing on finished garments, the DTF 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, with a trend towards adopting a direct sales model in certain key
markets, as we have done in North America. We have historically generated 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. Our agreement with our previous primary independent distributor in North America has terminated effective as of February 7, 2019. We
expect that we may experience an initial disruption to our sales efforts in that region as we transition from our previous sales structure to a direct sales model.
In addition, a shift to a direct sales model may result in a short-term adverse impact on our results of operations.
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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, 2018, we had 444 employees located across four
regions: Israel, America, 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,
2016, 2017 and 2018 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 consumables.
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.
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.
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We have historically sold our products directly and through independent distributors who resell them to customers. Sales by our distributors
accounted for approximately 49% and 44% of our revenues during 2017 and 2018, respectively. 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. On February 7, 2019, our agreement with our previous
primary independent distributor in North America, which accounted for 18% and 15% of our revenues in the years ended December 31, 2017 and 2018,
respectively, terminated. Despite our transition to a direct sales model in North America, we continue to generate a small, non-material portion of our
revenues from the distribution of our products in North America via certain independent distributors.
We recognize revenues in accordance with ASC No. 606, “Revenue from Contracts with Customers”. As such, we recognize revenue under the core
principle that transfer of control to our customers should be depicted in an amount reflecting the consideration we expect to receive in revenue. Therefore, we
identify a contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to each
performance obligation in the contract and recognize revenues when, or as, we satisfy a performance obligation.
We periodically provide customer incentive programs including product discounts, volume-based rebates and warrants, which are accounted for as
variable consideration which is deducted from 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
2016
2017
2018
$
%
$
%
$
%
(in thousands except percentages)
$
$
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% $
77,652
45,195
15,572
3,954
142,373
54.5%
31.7
10.9
2.9
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.
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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 stand-alone 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 four 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 DTF 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 pursuant to our direct
product distribution strategy in certain key markets.
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.
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Finance Income, Net
Finance income, 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, 2018, 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 25% in 2016 and 24% in 2017 and was reduced to 23% for 2018 and all subsequent years. 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 2016, 2017 or 2018 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.
Comparison of Period to Period Results of Operations
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, net
Income (loss) before taxes on income (tax benefit)
Taxes on income (tax benefit)
Net income (loss)
2016
Year Ended December 31,
2017
(in thousands)
2018
$
100,818 $
7,876
108,694
101,953 $
12,135
114,088
125,729
16,644
142,373
46,483
12,801
59,284
49,410
17,383
18,338
12,259
-
47,980
1,430
46
1,476
648
828 $
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) $
53,303
19,201
72,504
69,869
21,912
25,596
16,436
321
64,265
5,604
1,433
7,037
(5,392)
12,429
$
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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, net
Income (loss) before taxes on income (tax benefit)
Taxes on income (tax benefit)
Net income (loss)
Comparison of the Years Ended December 31, 2017 and 2018
Revenues
2016
Year Ended December 31,
2017
(as a % of revenues)
2018
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%
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)%
88.3%
11.7
100
37.4
13.5
50.9
49.1
15.4
18.0
11.5
0.2
45.1
3.9
1
4.9
(3.8)
8.7%
Revenues increased by $28.3 million, or 24.8%, to $142.4 million in 2018 from $114.1 million in 2017, which is net of $4.6 million and $2.9
million, in 2018 and 2017, respectively, in fair value of the warrants associated with revenues recognized from Amazon. The growth in revenues resulted
from a 16.4% increase in ink and other consumables revenues to $59.9 million in 2018 from $51.5 million in 2017, a 37.2% increase in service revenues to
$16.6 million in 2018 from $12.1 million in 2017, and an increase of 30.4% in systems revenues from $50.5 million in 2017 to $65.8 million in 2018. The
$8.4 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
$15.3 million increase in systems revenues was particularly attributable to the launch of HD systems and upgrades. 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.
Cost of Revenues and Gross Profit
Cost of revenues increased by $12.5 million, or 20.9%, to $72.5 million in 2018 from $60.0 million in 2017. Gross profit increased by $15.8 million,
or 29.1%, to $69.9 million in 2018 from $54.1 million in 2017. Gross margin was 49.1% in 2018, compared to 47.4% in 2017. Gross margin increased as a
result of the shift in mix of system revenues in favor of high throughput industrial systems, which have a relatively higher gross margin percentage, and due
to a decrease in inventory write offs by $1.2 million compared to 2017. The increase in gross profit was also due to economies of scale in our operations,
partially offset by lower services gross margin, which resulted from an increase in labor costs due to our more widely dispersed install base.
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Operating Expenses
Operating expenses:
Research and development
Sales and marketing
General and administrative
Restructuring expenses
Total operating expenses
Year Ended December 31,
2017
Amount
% of
Revenues
2018
Change
Amount
% of
Revenues
($ in thousands)
Amount
%
$
$
20,834
21,279
13,578
503
56,194
18.3% $
18.7
11.9
0.4
49.3% $
21,912
25,596
16,436
321
64,265
15.4% $
18.0
11.5
0.2
45.1%
1,078
4,317
2,858
(182)
8,071
5.2%
20.3
21.0
(36.2)
14.4%
Research and Development. Research and development expenses increased by 5.2% in 2018 compared to 2017. This resulted primarily from an
increase of $1.2 million in salaries and related personnel expenses and share based compensation due to an increase in the number of employees, with higher
seniority and variable compensation payout, compared to 2017. As a percentage of total revenues, our research and development expenses decreased during
this period from 18.3% in 2017 to 15.4% in 2018.
Sales and Marketing. Sales and marketing expenses increased by 20.3% in 2018 compared to 2017. This increase was primarily due to an increase of
$2.7 million in salaries and related personnel expenses and share-based compensation expenses mainly due to a higher average number of employees during
2018 compared to 2017, higher cost per employee in 2018, increase in sales commissions and variable compensation paid in 2018, and a $0.5 million increase
in distribution commissions paid due to a shift to direct sales of strategic accounts. As a percentage of total revenues, our sales and marketing expenses
decreased during this period from 18.7% in 2017 to 18.0% in 2018.
General and Administrative. General and administrative expenses increased by 21.0% in 2018 compared to 2017. This primarily resulted from an
increase of $3.1 million in salaries, related personnel expenses and share-based compensation expenses mainly due to the hiring of additional personnel, our
CEO transition, and variable compensation payments. As a percentage of total revenues, our general and administrative expenses decreased from 11.9% in
2017 to 11.5% in 2018.
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 and $0.3 million in 2017 and 2018, respectively,
related to those agreements.
Finance Income, Net
Finance income, net reflected income of $0.5 million in 2017 and income of $1.4 million in 2018. The $0.9 million increase primarily resulted from
$0.1 million of financial income in 2018 compared to $0.8 million of financial expense in 2017 resulting from exchange rate differences.
Taxes on Income
Taxes on income amounted to $0.4 million in 2017, compared to $5.4 million of tax benefit in 2018. We record net deferred tax assets to the extent
we believe these assets will more likely than not be realized. As of each reporting date, our management considers new evidence, both positive and negative,
that could impact management’s view with regards to the future realization of deferred tax assets for each jurisdiction. During the year ended December 31,
2018, we released $5.5 million of valuation allowances against our deferred tax assets, primarily related to the carrying forward of net operating losses, or
NOLs.
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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.
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.
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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.
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.
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
Effective January 1, 2018, we adopted the Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606) using the
modified retrospective method applied to those contracts which were not substantially completed as of January 1, 2018. As a result of this adoption, we
revised our accounting policy for revenue recognition as detailed below. The new standard application had no material effect on the pattern of our revenue
recognition.
We generate revenues from sales of systems, consumables and services. We generate revenues from sale of our products directly to end-users and
indirectly through independent distributors, all of whom are considered end-users. We recognize revenue under the core principle that transfer of control to
our customers should be depicted in an amount reflecting the consideration we expect to receive in revenue. Therefore, we identify a contract with a
customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to each performance obligation in
the contract, and recognize revenues when, or as, we satisfy a performance obligation.
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Revenues from products, which consist of systems and consumables, are recognized at the point in time when control has transferred, in accordance
with the agreed-upon delivery terms. In respect of sale of systems with installation and training, we consider the installation and training to be a separate
performance obligation from the systems. Therefore, revenues are recognized in accordance with the agreed-upon delivery terms once all other revenue
recognition criteria have been met.
Revenues from services are derived mainly from the sale of print heads, spare parts, upgrade kits and service contracts. Our print heads, spare parts
and upgrade kits revenues (collectively “Spare parts”) are recognized at the point in time when control has transferred, in accordance with the agreed-upon
delivery terms. Service contracts are recognized over time, on a straight-line basis, over the period of the service.
For multiple performance obligations arrangements, such as selling a system with a service contract, installation and training, we account for each
performance obligation separately, as it is distinct. The transaction price is allocated to each distinct performance obligation on a relative stand-alone selling
price, or SSP, basis, and revenue is recognized for each performance obligation when control has passed. In most cases, we are able to establish SSP based on
the observable prices of services sold separately in comparable circumstances to similar customers and for products based on our best estimates of the price at
which we would have sold the product regularly on a stand-alone basis. We reassess the SSP on a periodic basis or when facts and circumstances change.
We periodically provide customer incentive programs in the form of product discounts, volume-based rebates and warrants, which are accounted for
as variable consideration that are deducted from 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 according to historical experience and the specific terms and conditions of the incentive.
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.
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, 2018, we had $30.0 million of inventory of which $17.4 million consisted of raw materials and components and $12.6 million
consisted of completed systems, ink and other consumables. We recorded inventory write-offs in total amounts of $2.2 million, $3.0 million and $1.8 million
for the years ended December 31, 2016, 2017 and 2018, 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.
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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, 2016, 2017 and 2018 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.
Warranty costs
During 2018 we granted a one-year warranty on our systems and recorded a provision for warranty at the time at which a product’s revenue was
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 classify our
marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date and our expectations as to sales and
redemptions in the following year.
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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, 2017 and 2018, 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.
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 any 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 or certain other intangible property rights (other
than goodwill) that were purchased in good faith and 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.
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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.
The following discussion is a summary of the Investment Law following its most recent amendments:
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, referred to as Approved Enterprises. 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.
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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 within 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 within 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 within Israel.
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 deferred 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.
We currently have Benefited Enterprise programs under the Investment 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. We
believe that our Israeli subsidiary Kornit Digital Technologies will meet the condition to qualify as a Preferred Technological Enterprise under the 2017
Amendment (as described below), as it meets the relevant conditions, and therefore will be subject to a tax rate of 12%.
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 an industrial company that was incorporated in Israel, which is
not wholly owned by a governmental entity, and which 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 was 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.
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The tax benefits under the 2011 Amendment also include accelerated depreciation and amortization for tax purposes.
As of January 1, 2014, 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 the Preferred Technology Income derived from R&D 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 National Authority for Technological Authority (previously known as the Israeli Office of the Chief Scientist), referred
to as the Innovation Authority.
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.
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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 (although, if such dividends are subsequently distributed from such Israeli company to individuals or a non-Israeli company,
withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). 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% (or a lower
rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
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 of 2017, which among other provisions, reduced the U.S. corporate tax rate from
35% to 21%, effective January 1, 2018.
At December 31, 2017, we re-measured our U.S. deferred tax assets and liabilities, based on the new rates at which they are expected to reverse in
the future. The tax expense recorded in 2017, related to the re-measurement of the deferred tax balance, was $355 thousand.
B. Liquidity and Capital Resources
As of December 31, 2018, we had approximately $74.1 million in cash and cash equivalents, $5.0 million in short term deposits and $48.6 million in
marketable securities, which, in the aggregate, total $127.7 million. We fund our operations with cash generated from operating activities and cash raised via
our April 2015 IPO and our January 2017 follow-on 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.
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 decreased due to the significant improvement in our days sales’ outstanding, or DSO. Our trade payables increased due to an increase in sales
projected for 2019 compared to the projection for 2018.
As of December 31, 2018, we have two lines of credit with Israeli banks for total borrowings of up to $3 million, all of which was undrawn as of
December 31, 2018. These lines of credit are unsecured and available subject to our 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 our and our subsidiaries’ receivables. Interest rates across these credit lines varied from
0.2% to 2.3% as of December 31, 2018.
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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, 2018
2016
Year Ended December 31,
2017
(in thousands)
2018
$
956 $
2,463
939
5,990 $
(46,744)
36,437
33,368
16,682
5,525
Net cash provided by operating activities in the year ended December 31, 2018 was $33.4 million.
Net cash provided by operating activities consisted of net income of $12.4 million, as adjusted upwards in an amount of $16.3 million for non-cash
line items, including stock-based compensation expenses, depreciation, amortization of intangible assets, fair value of warrants deducted from revenues,
amortization of premium on marketable securities, realized loss on sale of marketable securities and foreign currency translation gain on inter-company
balances with foreign subsidiaries.
During 2018, our accounts receivables decreased by $1.1 million due to improvement in collection during December 2018, and as a result our days
sales’ outstanding, or DSO, for the year ended December 31, 2018 was 56 compared to 74 for the year ended December 31, 2017.
During 2018, our inventory decreased by $4.0 million relative to the year ended December 31, 2017. This was primarily due to an improvement in
our sales and operations planning process.
We also experienced an increase of $4.4 million in trade payables that mainly derived from an increase in the sales that we projected for 2019
compared to 2018, in line with the growth in our sales and operations.
In addition, we also had an increase in deferred taxes in 2018. Please see “ITEM 5. Operating and Financial Review and Prospects – A. Operating
Results — Comparison of the Years Ended December 31, 2017 and 2018.”
Year Ended December 31, 2017
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, as adjusted upwards in an amount of $12 million for non-cash line
items, including due to a decrease of $9 million in accounts receivables due to lower revenues and higher payments received prior to the cutoff date of
December 31, 2017. Our DSO for the year ended December 31, 2017 was 74 compared to 106 for the year ended December 31, 2016.
During 2017 we had an increase of approximately $10.6 million in inventory relative 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. 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.
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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, as adjusted upwards due to an increase of approximately
$6.1 million in inventory from the year ended December 31, 2015 to the year ended December 31, 2016. The increased inventory levels were primarily
attributable to our strategy of meeting 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 DSO for the year ended December 31, 2016 was 106 compared to 95 for the year ended December 31, 2015 as a result of better payment
terms that we provided to our customers.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was $16.7 million for the year ended December 31, 2018, which was primarily attributable to our proceeds
from sale and maturity of marketable securities of $47.2 million, offset by investment in short term bank deposits and marketable securities of $23.2 million
and purchase of property, plant and equipment of $7.3 million. Net cash used in investing activities for the year ended December 31, 2017, was $46.7 million
which was primarily attributable to our investment in short term bank deposits and marketable securities. Net cash provided by investing activities for the
year ended December 31, 2016, was $2.5 million 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 $5.5 million for the year ended December 31, 2018, which was attributable to the exercise of share
options, partially offset by payment of contingent consideration in connection with the acquisition of SPSI in an amount of $0.9 million. Net cash provided by
financing activities was $36.4 million for the year ended December 31, 2017, which was primarily attributable to our follow-on offering in January 2017, in
which we 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.
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F. Tabular Disclosure of Contractual Obligations
Our contractual obligations as of December 31, 2018 are summarized in the following table:
Payments Due by Period
(in thousands)
Total
2019
2020
2021
2022
2023
Operating lease obligations (1)
Uncertain tax positions (2)
Purchase commitments (3)
Severance payment (4)
Total
$
$
14,411 $
2,240
12,596
1,059
30,306 $
2,549 $
2,415 $
2,114 $
1,998 $
12,596
15,145 $
2,415 $
2,114 $
1,998 $
(1) Operating lease obligations consist of our contractual rental expenses under operating leases of facilities and vehicles.
2024
and
thereafter
3,684
-
-
-
3,684
1,651 $
1,651 $
(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(i) 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 purchase order, or PO, commitments through the end of 2019.
(4) Severance payments obligation of $1.1 million are payable only upon termination, retirement or death of our employees. Of this amount, $0.7 million is
unfunded as of December 31, 2018. 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 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
Ronen Samuel
Guy Avidan
Gilad Yron
Directors
Yuval Cohen
Ofer Ben-Zur
Eli Blatt
Lauri Hanover(1)(2)(3)(4)
Marc Lesnick
Alon Lumbroso(3)
Yehoshua (Shuki) Nir (1)(2)(3)(4)
Dov Ofer(1)(2)(3)
Gabi Seligsohn
Age
50
56
46
56
54
56
59
52
61
49
65
52
Position
Chief Executive Officer
Chief Financial Officer
Executive Vice President of Global Business
Chairman of the Board of Directors
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 Companies Law.
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Executive Officers
Ronen Samuel has served as our Chief Executive Officer since August 1, 2018. Prior to joining our company, Mr. Samuel served in various
capacities at Hewlett –Packard, or HP, over the course of the previous 18 years. Most recently, he served as Vice President and General Manager of HP Indigo
and WebPress EMEA. Prior to that, Mr. Samuel led HP’s Asia Pacific and Japan region for seven years. He was also engaged in Strategic Marketing while at
HP, working closely with Research and Development to define future products. While at HP, Mr. Samuel also served in various capacities as product/project
manager. Prior to his career in printing technology, Mr. Samuel spent seven years in the Israeli Air Force, rising to the rank of major while serving as a fighter
pilot and leading the establishment of Israel’s second Apache Squadron. Mr. Samuel received an M.B.A. from Northwestern University’s Kellogg School of
Management and received an undergraduate Business and Law degree from The Interdisciplinary Center in Herzliya, Israel.
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 former controlling shareholder. From 1997 through 2002, Mr. Cohen was a General Partner at
Jerusalem Venture Partners (“JVP”), an Israeli-based venture capital fund. 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.
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.
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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 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. 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.
Alon Lumbroso has served as a member of our board of directors since March 2015. Since June 2015 until August 2017, Mr. Lumbroso has been the
chief executive of Dip-Tech Ltd. and from August 2017 until November 2018 served as Managing Director of Dip-Tech that become a subsidiary of Ferro
(NYSE: FOE) a leading global functional coatings and color solutions. 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. 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.
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Yehoshua (Shuki) Nir has served as a director since July 2018, and is an external director under the Companies Law, the chairman of our
compensation committee and a member of our audit committee. Since March 2017, Mr. Nir has served a director at Earlysense Ltd., a company that provides
contact-free, continuous monitoring solutions for the medical and consumer digital health markets. From December 2012 to May 2016, Mr. Nir served as
Senior Vice President, Corporate Marketing, and General Manager, Retail of Sandisk Corp., or Sandisk. From March 2008 to November 2012, Mr. Nir served
as Senior Vice President and General Manager, Retail of Sandisk. From November 2006 through March 2008, he served in various other sales and marketing
roles as a Vice President of Sandisk. Mr. Nir also served in various sales and marketing roles as a Vice President at msystems Ltd. from February 2003 until
November 2006, when it was acquired by Sandisk. Prior to that, Mr. Nir held sales and marketing positions at Destinator Ltd. and also co-founded and served
as Chief Executive Officer of MindEcho, Inc. Mr. Nir is a member of the board of directors of EarlySense Ltd., a company that provides contact-free,
continuous monitoring solutions for the medical and consumer digital health markets. Mr. Nir has a B.A. in Law and Accounting and an M.B.A. from Tel
Aviv University.
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.
Gabi Seligsohn has served as a member of our board of directors since March 2015. He also served as our Chief Executive Officer from April 2014
through July 2018. 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.
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, 2018 was $5.0 million. This amount includes approximately $0.3 million set aside or accrued
to provide pension, severance, retirement or similar benefits or expenses. As of December 31, 2018, options to purchase 385,396 ordinary shares and 103,481
RSU’s granted to our directors and executive officers were outstanding under our share incentive plans, with a weighted average exercise price of $12.70 per
share for the options. Certain of our officers and directors receive a severance payment of up to four months’ of their base salary upon termination of their
employment.
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The following table presents the grant dates, number of options and RSUs, and related exercise prices and expiration dates of options granted to our
directors and executive officers for the year ended December 31, 2018:
Grant Date
February 15, 2018
July 19, 2018
August 1, 2018
August 8, 2018
Director Compensation
Number of Options
Number of RSUs
(per Share) of Options
Exercise Price
Expiration Date
of Options
42,500
20,000
33,849
38,567
14,167 $
18.80
August 8, 2028
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 $35,000 and $41,000 for the chairman; and
● per-meeting fees in the amount of $1,000 or $500 for participation in meetings via phone.
In addition, commencing with our 2018 annual general meeting of shareholders, we provide for annual restricted share unit, or RSU, grants to our
non-employee directors. The number of RSUs granted to each director is linked to a fixed value— $100,000, in the case of the Chairman of the Board, and
$80,000, in the case of all other non-employee directors. The actual number of RSUs to be granted each year with the foregoing $100,000 and $80,000 values
is determined based on the closing price of our ordinary shares on the NASDAQ Global Select Market on the date of our annual shareholder meeting. Our
RSU grant agreements for non-employee directors are subject to the following additional terms:
● the RSUs are granted to each non-employee director as of the date of the annual shareholder meeting and on the date of each annual general
meeting thereafter;
● the RSUs vest in their entirety on the first anniversary of the grant, provided the director continues to serve as a director of our company at such
anniversary;
● the RSUs, to the extent then unvested, become fully vested (a) immediately prior to the consummation of a Change of Control (as defined under
our 2015 Plan (described below)) in which the director is required to resign from or is otherwise terminated from the service as a director, or (b)
upon termination of service of such director occurring immediately after the consummation of a Change of Control; and
● the RSUs are otherwise subject to the terms of the 2015 Plan.
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, 2018, 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.”
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For purposes of the table and the summary below, and in accordance with the above-mentioned securities regulations, “compensation” includes base
salary, variable compensation, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits
and any undertaking to provide such compensation.
Summary Compensation Table
Information Regarding the Covered Executive(1)
Name and Principal Position(2)
Ronen Samuel, Chief Executive Officer
Gabi Seligsohn, former Chief Executive Officer
Guy Avidan, Chief Financial Officer
Gilad Yron, EVP Global Business
Nuriel Amir, former Chief Technology Officer
Base Salary
($)
243
531
259
342
238
Benefits and
Perquisites
($)(3)
Variable
compensation
($)(4)
(in thousands, US dollars)
67
77
58
59
57
362
367
155
183
134
Equity-Based
Compensation
($)(5)
Total
($)
73
300
365
247
163
708
1,275
838
830
593
(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 2018.
(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 variable compensation payments which were paid or accrued with respect to 2018.
(5) Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2018 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.
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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 no longer grant options under the 2004 Plan because it was superseded by the 2012 Plan, although previously granted awards
remain outstanding. As of December 31, 2018, we had options to purchase 1,909 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 under 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.
The 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.
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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 no longer grant options under the 2012 Plan because it was superseded by the 2015 Plan, although awards that were previously
granted under the 2012 Plan 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, 2018, we had options to purchase 187,018 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.
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.
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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 least 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, 2018, we had options to purchase 1,394,637 ordinary shares and 414,420 unvested RSUs outstanding under the 2015 Plan and
1,960,465 ordinary shares reserved for additional grants, including the increase which was effective on January 1, 2019.
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.
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, an 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.
RSUs 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. RSUs, once vested, may be settled for the grantee 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.
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The compensation 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 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.
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 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 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 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 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 least 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.
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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.
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 non-external 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 2021 and when their successors are elected and qualified.
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Our board of directors has determined that our directors, Lauri Hanover, Alon Lumbroso, Yehoshua (Shuki) Nir 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) within seven days following our publication of notice of an upcoming
annual shareholder meeting (or within 14 days after we publish a preliminary notification of an upcoming annual shareholder meeting). Any such shareholder
nomination 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.
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. Because we have not met the
majority Board independence requirement under the NASDAQ Stock Market rules up to the current time, and have opted out from it as a foreign private
issuer (see ITEM 16G below), we have been unable to elect to exempt our company from the Companies Law requirements related to the appointment of
external directors and the composition of the audit and compensation committees.
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 Yehoshua (Shuki) Nir serve as our external directors. Mr. Nir was initially elected at our July 2018 annual shareholder meeting and replaced Mr.
Jerry Mandel, whose initial three-year term expired in June 2018.
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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).
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.
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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.
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.
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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, generally, at least one of the external
directors must be determined by our board of directors to have accounting and financial expertise.
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 Lauri Hanover possesses accounting expertise, financial expertise and/or 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.
Board Committees
Audit Committee
Our audit committee consists of three members: our two external directors— Lauri Hanover (Chairperson) and Yehoshua (Shuki) Nir— 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 unaffiliated
directors. In general, an “unaffiliated 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.
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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 qualifies as an audit committee financial expert, as defined
by the SEC rules, and has the requisite financial experience, as defined by the 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.
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;
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● 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 three members: our two external directors— Yehoshua (Shuki) Nir (Chairman) and Lauri Hanover— as
well as Dov Ofer.
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 these composition requirements if they opt out from them, as part
of opting out from the requirement to appoint external directors; provided, however, that the compensation committee meets the composition requirements for
the compensation committee (along with the composition requirements for the audit committee and board majority independence 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 Companies Law’s requirement to have a majority of external directors on the compensation committee,
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 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.
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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 or, in
the case of the initial compensation policy of a company that has recently undergone its initial public offering, five years (approval of either a
new compensation policy or the continuation of an existing compensation policy must in any case occur every three years or, upon the
expiration of the initial period for a company that recently underwent its initial public offering, after five 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.
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 has adopted a compensation committee charter that sets forth the responsibilities of the compensation committee, which
include:
● the responsibilities set forth in the compensation policy;
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● 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 “B. Compensation—Director Compensation” in this ITEM 6.
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.
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 of our company 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.
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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 conflict of interest (referred to under the
Companies Law as a “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;
● 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.
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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.
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, with
directors, or with the chief executive officer, that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval
upon certain determinations of the audit committee or compensation committee (as applicable), and the board of directors.
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;
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● 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;
● 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.
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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.
D. Employees
As of December 31, 2018, we had 444 employees and subcontractors, with 277 located in Israel, 77 in the United States, 53 in Europe and 37 in Asia
Pacific. 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
2016
As of December 31,
2017
2018
69
87
68
115
51
390
66
87
73
122
64
412
79
98
83
115
69
444
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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, 2019:
● 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.
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, 2019 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 35,178,114 ordinary shares outstanding as of March 15, 2019.
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.”
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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
American Capital Management Inc. (1)
Clal Insurance Enterprises Holdings Ltd. and affiliates(2)
Granahan Investment Management, Inc. (3)
Directors and Executive Officers
Yuval Cohen
Ofer Ben-Zur
Eli Blatt
Lauri Hanover
Marc Lesnick
Alon Lumbroso
Jerry Mandel(4)
Dov Ofer
Gabi Seligsohn
Yehushua (Shuki) Nir
Ronen Samuel
Nuriel Amir(5)
Guy Avidan
Gilad Yron
All Directors and Executive Officers as a Group (14 persons)
Number of
Shares
Beneficially
Held
2,847,478
2,610,128
1,801,252
Percent
8.09%
7.4%
5.1%
*
*
*
*
*
*
*
*
*
*
-
*
*
*
*(6)
*
*
*
*
*
*
*
*
*
*
-
*
*
*
*
* Represents beneficial ownership of less than 1% of our outstanding ordinary shares.
(1) As of December 31, 2018, based on a Form 13F filed with the SEC on February 8, 2019.
(2) As of December 31, 2018, based on an amendment to Schedule 13G, and an initial Schedule 13G, filed by Clal Insurance Enterprises Holdings Ltd., or
Clal, and by IDB Development Corporation Ltd., or IDB, respectively, with the SEC, in each case on February 14, 2019. All of the ordinary shares
reported as beneficially owned by Clal are held for members of the public through, among others, provident funds and/or pension funds and/or insurance
policies, which are managed by subsidiaries of Clal, which subsidiaries operate under independent management and make independent voting and
investment decisions. Consequently, Clal does not admit beneficial ownership of any of those shares. IDB is an affiliate of Clal and is deemed to
beneficially own the ordinary shares held by Clal, along with an additional 140 ordinary shares held directly by Epsilon Investment House Ltd., an
indirect subsidiary of Discount Investment Corporation Ltd., an Israeli public corporation, which is controlled by Eduardo Sergio Elsztain. Those
additional shares are held by portfolio management and/or mutual funds, which are managed by Epsilon Investment House Ltd. and/or Epsilon Mutual
Funds Management (1991) Ltd. for the accounts of third-party clients. Accordingly, Mr. Elsztain disclaims beneficial ownership of those additional
ordinary shares.
(3) As of December 31, 2018, based on an amendment to Schedule 13G filed by Granahan Investment Management, Inc. with the SEC on February 12,
2019.
(4) Mr. Mandel served as an external director at our company for a three-year term that expired in March 2018.
(5) Mr. Amir served as our Chief Technology Officer through December 31, 2018, at which point his employment was terminated by our company, subject to
a three-month notice period that expires on March 31, 2019.
(6) Consists of ordinary shares, options to purchase ordinary shares and RSUs that may be exercised or settled (as applicable) within 60 days of March 15,
2019.
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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 May 2017,
Fortissimo Capital sold 4,250,000 of our ordinary shares in a secondary public offering, which decreased its holdings in our Company to 4,552,481 ordinary
shares, or 13.5% of our outstanding ordinary shares. Over the course of 2018, Fortissimo Capital sold additional ordinary shares, thereby reducing its
beneficial ownership further, and in December 2018, Fortissimo Capital sold all remaining 3,132,481 ordinary shares held by it in a secondary public offering.
In February 2017, our former 5% shareholder, FMR LLC, reported that it had sold during 2016 all of the ordinary shares previously held by it.
In January and February 2018, several shareholders reported that they had acquired in excess of 5% of our outstanding shares over the course of
2017, including: Senvest Management, LLC (5.0%); American Capital Management, Inc. (7.3%); Granahan Investment Management, Inc. (6.9%); William
Blair & Company, LLC (7.3%); and Gilder, Gagnon, Howe & Co. LLC (5.2%). In addition, in April 2018, Clal reported that it had acquired 5.0% of our
outstanding ordinary shares.
In February 2019, each of Senvest Management, LLC, William Blair & Company, LLC and Gilder, Gagnon, Howe & Co. LLC reported that it had
ceased to be a 5% shareholder as of the end of 2018, having dropped to beneficial ownership of 1.5%, 3.9% and 3.2%, respectively, as of that time. In
February 2019, each of Granahan Investment Management, Inc. and Clal reported changes in its beneficial ownership as of the end of 2018, to 5.2% and
7.5%, respectively, of our outstanding ordinary shares.
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, 2018, 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.
Investors’ Rights Agreement and Underwriting Agreement for December 2018 Secondary Offering
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. Fortissimo Capital, our former significant shareholder, was a party to this agreement. Pursuant to Fortissimo Capital’s shelf registration rights
under this agreement, we filed a shelf registration statement on Form F-3 in January 2017 and three prospectus supplements for underwritten secondary
offerings by Fortissimo Capital (in January 2017, May 2017, and December 2018). As a result of those offerings, Fortissimo Capital has sold all of its
ordinary shares and no longer has any rights under the Investors’ Rights Agreement. For a description of the underwriting agreement, dated December 3,
2018, to which we were party with Fortissimo Capital and the underwriters for the December 2018 secondary offering, please see “ITEM 10.C—Material
Contracts—Underwriting Agreements for May 2017 and December 2018 Secondary Offerings” below in this annual report.
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Certain shareholders that currently hold less than 5% of our ordinary shares may still possess the right to request inclusion of registrable securities in
any registration that we effect (subject to customary exceptions) pursuant to their “piggyback” registration rights under the Investors’ Rights Agreement.
Under those rights, those shareholders are entitled to at least 15 days’ notice prior to the filing of a 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. 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
piggyback registration. These piggyback registration rights will terminate for any given shareholder when that shareholder holds less than 3% of our
outstanding shares and such shareholder’s registrable securities can be sold without volume restrictions, manner of sale restrictions or notice requirements
pursuant to Rule 144 under the Securities Act.
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 and RSUs
Since our inception we have granted options to purchase our ordinary shares to our officers and certain of our directors, and, commencing in 2018
(following approval by our shareholders), we began awarding annual RSU grants to our non-employee directors. Our option agreements may contain, and the
terms of our RSU grants do contain, acceleration provisions upon certain merger, acquisition, or change of control transactions (in the case of the RSU grants,
upon termination of, or resignation by, a non-employee director in connection with any such transaction or immediately thereafter). We describe our equity
incentive 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.
Indemnification Agreements
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.
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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.
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:
2019 (through March 15, 2019)
2018
2017
2016
2015 (beginning April 2, 2015)
Quarterly:
First Quarter 2019 (through March 15, 2019)
Fourth Quarter 2018
Third Quarter 2018
Second Quarter 2018
First Quarter 2018
Fourth Quarter 2017
Third Quarter 2017
Second Quarter 2017
First Quarter 2017
Most Recent Six Months (and Most Recent Partial Month):
March 2019 (through March 15, 2019)
February 2019
January 2019
December 2018
November 2018
October 2018
September 2018
$
$
$
High
Low
(in U.S. dollars)
23.66
23.90
23.15
14.70
17.50
23.66
23.90
22.20
18.55
16.95
17.95
21.80
23.15
19.75
23.35
23.66
20.49
23.70
23.90
22.18
22.20
17.87
11.70
12.05
8.10
9.91
17.87
16.10
17.15
12.70
11.70
14.55
12.85
16.46
12.05
20.74
18.93
17.87
16.10
18.10
17.01
19.15
On March 22, 2019, the closing sales price of our ordinary shares on the NASDAQ Global Select Market was $23.35.
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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.
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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.”
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.
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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.”
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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.”
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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.
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.
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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.”)
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 are not party to 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.
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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, 2018, warrants to purchase 1,111,773 ordinary shares have been vested and are exercisable.
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.
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.
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Underwriting Agreements for January 2017 Secondary and Follow-On Offering
We entered into an underwriting agreement, dated January 25, 2017, with Fortissimo Capital and Mr. Gabi Seligsohn, as selling shareholders, and
Barclays Capital Inc. and Citigroup Global Markets Inc., as representatives of the underwriters, for the underwritten secondary public offering of 5.5 million
of our ordinary shares by the selling shareholders, in the aggregate, and underwritten primary follow-on offering of 2 million ordinary shares by our company.
The selling shareholders and our company received $86.2 million and $31.4 million, respectively, of net proceeds, before expenses, from the offering. Under
the agreement, one of the selling shareholders and our company also granted the underwriters a 30-day option to purchase up to an aggregate of 1,125,000
additional ordinary shares at the public offering price. 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 Agreements for May 2017 and December 2018 Secondary Offerings
We entered into additional underwriting agreements, dated May 16, 2017 and December 3, 2018, in each case with Fortissimo Capital, as the selling
shareholder, and Barclays Capital Inc. and Citigroup Global Markets Inc., as representatives of the underwriters, for the underwritten secondary public
offering of an additional 4,250,000 and 3,132,481, respectively, of our ordinary shares sold by Fortissimo Capital. Fortissimo Capital received approximately
$85.7 million and $62.6 million of net proceeds, before expenses, from those respective secondary public offerings. Under the May 2017 underwriting
agreement, Fortissimo granted the underwriters a 30-day option to purchase up to an additional 637,500 ordinary shares at the public offering price. 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, Plant 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, Plant and Equipment.”
Lease dated December 2017 between Bonanno Real Estate Group I, L.P. and
Kornit Digital North America, Inc.
“ITEM 4.D. Property, Plant and Equipment.”
Development Contract, dated November 26, 2018, by and between us and the
Israel Lands Authority
“ITEM 3.D. Risk Factors—Risks Related to Our Business and Our Industry
— Our new Kiryat Gat facility…”.
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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 2018) unless the benefiting provisions of an
applicable treaty applies.
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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.
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.
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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.
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 a certain level, 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 and NIS 649,560 in 2019) (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.
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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.
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.
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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.
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.
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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;
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, 2018, and furthermore do not expect to be classified for the taxable year ending December 31, 2019. 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,
2019, 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.
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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.
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.
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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.
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.
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G. Statement by Experts.
Not applicable.
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 2018, approximately 85% of our revenues were
denominated in U.S. dollars and 15% of our revenues were denominated in Euros. Conversely, in 2018, 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.
The following table presents information about the changes in the exchange rates of the NIS and the Euro against the U.S. dollar:
Period
2016
2017
2018
106
Change in Average
Exchange Rate
U.S. Dollar
against the
NIS
(%)
U.S. Dollar
against the
Euro
(%)
(1.1)
(6.3)
(0.8)
(0.3)
(1.9)
(4.5)
Table of Contents
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 $(1.7) or $1.4 million in 2017 and $(3.3) or $2.7 million in 2018. 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 $(0.8) or $1.0 million in 2017 and $(1.1) or $1.4 million in
2018. 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 2017 and 2018, 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, 2017 and December 31, 2018,
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.
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ITEM 13. Defaults, Dividend Arrearages and Delinquencies.
None.
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
PART II
Not applicable
A-
D.
E. Use of Proceeds
Initial Public Offering
There has been no change in the information regarding the use of proceeds from our IPO since the last annual report on Form 20-F that we filed in
March 2018. Our operations generate positive cash flow, and, as such, we did not use any further proceeds from our IPO during the year ended December 31,
2018.
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, 2018. Based on their evaluation, our
principal executive officer and principal financial officer concluded that as of December 31, 2018, 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;
● 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, 2018 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, 2018.
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(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 Lauri Hanover, 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, 2018.
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, 2017
Percentage
Amount
Year Ended December 31, 2018
Percentage
Amount
336
104
17
457
73% $
319
23%
4%
81
53
70%
18%
12%
100% $
453
100%
$
$
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“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.
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 NASDAQ Listing Rules.
ITEM 16H. Mine Safety Disclosure.
Not applicable.
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ITEM 17.
Financial Statements.
Not applicable.
ITEM 18.
Financial Statements.
See pages F-2 through F-47 appended hereto.
ITEM 19. Exhibits.
Please see the exhibit index incorporated herein by reference.
PART III
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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 26, 2019
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ANNUAL REPORT ON FORM 20-F
INDEX OF EXHIBITS
Description
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, Addendum to Lease Agreement, dated
December 28, 2015, Addendum to the Lease Agreement dated October 17, 2017, Addendum dated February 21, 2018, Addendum to the
Lease Agreement, dated April 23, 2018, and Addendum to the Lease Agreement, dated January 3, 2019
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, Addendum to Lease Agreement, dated September 16, 2014,
Addendum to the Lease Agreement dated March 16, 2015, an Addendum to the Lease Agreement dated August 31, 2017, and an Addendum
to the Lease Agreement dated June 24, 2018
OEM Supply Agreement, dated December 3, 2015, among the Registrant and FujiFilm Dimatix, Inc. †(5)
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. (11)
English translation of Development Contract, dated November 26, 2018, by and between the Registrant and the Israel Lands Authority
Exhibit No.
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
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Exhibit No.
8.1
12.1
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
Description
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.
(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 furnished to the SEC on August 21, 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.
(11) Previously filed with the SEC on March 20, 2018 as Exhibit 4.16 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.
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KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2018
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-47
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, 2017 and 2018, 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, 2018, 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, 2017 and 2018, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2018, 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.
/s/ KOST FORER GABBAY & KASIERER
A Member of EY Global
We have served as the Company‘s auditor since 2012.
Tel-Aviv, Israel
March 26, 2019
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 other long term assets
Severance pay fund
Deferred taxes
Property, plant 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,
2017
2018
$
18,629 $
4,500
5,537
23,245
34,855
2,661
74,132
5,000
3,981
21,953
30,030
5,660
89,427
140,756
68,835
627
523
564
11,230
2,076
5,092
44,603
744
351
7,272
14,994
1,011
5,092
88,947
74,067
$
178,374 $
214,823
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, 2017 and 2018,
respectively; Issued and Outstanding: 34,124,223 shares and 35,065,200 shares at December 31, 2017 and 2018,
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,
2017
2018
$
12,439 $
6,338
1,697
5,046
16,614
7,932
3,633
4,993
25,520
33,172
1,232
334
589
2,155
1,059
-
1,456
2,515
86
140,170
301
10,142
89
156,714
(238)
22,571
150,699
179,136
$
178,374 $
214,823
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, net
Income (loss) before taxes on income (tax benefit)
Taxes on income (tax benefit)
Net income (loss)
Basic net earnings (losses) per share
Diluted net earnings (losses) 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,
2017
2018
2016
$
100,818 $
7,876
108,694
101,953 $
12,135
114,088
125,729
16,644
142,373
46,483
12,801
59,284
46,480
13,497
59,977
53,303
19,201
72,504
49,410
54,111
69,869
17,383
18,338
12,259
-
20,834
21,279
13,578
503
21,912
25,596
16,436
321
47,980
56,194
64,265
1,430
(2,083)
46
452
1,476
648
(1,631)
384
5,604
1,433
7,037
(5,392)
828 $
(2,015) $
12,429
0.03 $
(0.06) $
0.03 $
(0.06) $
0.36
0.35
$
$
$
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, net of tax benefit of $0, $0 and $36,
respectively
Losses (gains) reclassified into net income (loss)
Net change
Change in unrealized gains (losses) on cash flow hedges:
Unrealized gains arising during the period, net of tax benefit of $0, $0 and $7, respectively
Losses (gains) reclassified into net income (loss)
Net change
Foreign currency translation adjustment
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2017
2016
2018
$
828 $
(2,015) $
12,429
133
(6)
127
97
(66)
31
43
104
(34)
70
436
(394)
42
271
(887)
480
(407)
(230)
92
(138)
6
Total other comprehensive income (loss), net of tax
201
383
(539)
Comprehensive income (loss)
$
1,029 $
(1,632) $
11,890
The accompanying notes are an integral part of the consolidated financial statements
F-6
Table of Contents
STATEMENTS OF SHAREHOLDERS’ EQUITY
U.S. dollars in thousands, except share data
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Ordinary shares
Number of
shares
outstanding Amount
Additional
paid in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
Shareholders’
equity
Balance at December 31, 2015
30,295,949
76
89,071
(283)
11,398
100,262
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
Exercise of options and vesting of restricted stock units
Share-based compensation
Warrants to customers
Other comprehensive loss
Net income
Balance at December 31, 2018
693,924
-
-
-
-
-
30,989,873 $
2,300,000
834,350
-
-
-
-
-
34,124,223 $
940,977
-
-
-
-
35,065,200 $
2
-
-
-
-
-
78 $
6
2
-
-
-
-
-
86 $
3
-
-
-
-
89 $
958
2,993
71
1,873
-
-
94,966 $
35,071
2,758
4,411
69
2,895
-
-
140,170 $
6,422
5,546
4,576
-
-
156,714 $
The accompanying notes are an integral part of the consolidated financial statements.
F-7
-
-
-
-
-
-
-
201
-
(82) $
-
-
828
12,226 $
-
-
-
-
-
383
-
301 $
-
-
-
(539)
-
(238) $
-
-
-
(69)
-
-
(2,015)
10,142 $
-
-
-
-
12,429
22,571 $
960
2,993
71
1,873
201
828
107,188
35,077
2,760
4,411
-
2,895
383
(2,015)
150,699
6,425
5,546
4,576
(539)
12,429
179,136
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 operating activities:
Depreciation and amortization
Fair value of warrants deducted from revenues
Share based compensation
Tax benefit related to exercise of stock options
Amortization of premium on marketable securities
Realized loss (gain) on sale of marketable securities
Decrease (increase) in trade receivables
Decrease (increase) in other receivables and prepaid expenses
Decrease (increase) in inventories
Increase in deferred taxes
Increase in other deposits and 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, plant and Equipment
Foreign currency translation gain (loss) on intercompany balances with foreign subsidiaries
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Cash paid in connection with acquisition
Proceeds from (investment in) bank deposits
Proceeds from sale marketable securities
Proceeds from maturity of marketable securities
Investment in 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
Foreign currency translation adjustments on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
2016
December 31,
2017
2018
$
828 $
(2,015) $
12,429
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)
4,965
4,576
5,546
-
388
480
1,069
(3,135)
4,037
(6,665)
(121)
4,394
1,621
1,981
548
(1)
867
-
389
956
5,990
33,368
(5,462)
-
(9,206)
22,000
2,086
4,500
(11,455)
(5,660)
6
-
(4,500)
39,353
7,240
(83,183)
(7,294)
-
-
(500)
40,635
6,564
(22,723)
2,463
(46,744)
16,682
-
958
(90)
71
-
35,077
2,760
-
-
(1,400)
939
36,437
(33)
157
-
6,425
-
-
(900)
5,525
(72)
4,325
18,464
(4,160)
22,789
55,503
18,629
Cash and cash equivalents at the end of the period
$
22,789 $
18,629 $
74,132
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, plant and equipment acquired by credit
Inventory transferred to be used as property, plant and equipment
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,
2017
2016
2018
593 $
853 $
1,797
808 $
427 $
1,090 $
397 $
362 $
- $
222
591
-
$
$
$
$
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. 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.
b.
c.
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.
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.
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.
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.)
b.
Financial statements in United States dollars:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
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 sales 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. Marketable securities:
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 at the time of purchase and re-evaluates such determinations at
each balance sheet date. The Company classifies its marketable securities as either short-term or long-term based on each instrument’s
underlying contractual maturity date and the entity’s expectations of sales and redemptions in the following year.
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.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The Company classifies all of its marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported in “accumulated other comprehensive income (loss)” in shareholders’ equity. Realized gains
and losses on sales of marketable securities are included in finance income, 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 income, net.
The Company recognizes an impairment charge when a decline in the fair value of its investments in marketable 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 2016, 2017 and 2018.
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 based upon assumptions about future demand, and is charged to 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.
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, 2016, 2017 and 2018, the Company recorded inventory write offs in a total amount of $2,211, $2,988
and $1,759, respectively.
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.)
h.
Property, plant and equipment:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Property, plant 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
Building and land
%
7 - 20
33
7 - 33
*)
**)
*)
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.
**) Building and land consist of land and a new ink manufacturing plant. In September 2018 the company purchased the land which
includes long-term leasehold rights, with lease term of 98 years. As of December 31, 2018, the ink manufacturing plant in under
construction. Depreciation of the manufacturing plant will begin upon completion of its construction.
i.
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 statement of income in the period incurred.
j.
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.
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.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
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, 2016, 2017 and 2018, 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.
k.
Impairment of long-lived assets and intangible assets subject to amortization:
Property, plant 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, 2016, 2017 and 2018, no impairment losses were recorded.
l.
Revenue recognition:
The Company generates revenues from sales of systems, consumables and services. 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.
The Company recognizes revenues in accordance with ASC No. 606, “Revenue from Contracts with Customers”. As such, the Company
recognizes revenue under the core principle that transfer of control to the Company’s customers should be depicted in an amount reflecting
the consideration the Company expects to receive in revenue. Therefore, the Company identifies a contract with a customer, identifies the
performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in
the contract and recognizes revenues when, or as, the Company satisfies a performance obligation.
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
Revenues from products, which consist of systems and consumables, are recognized at the point of time when control has transferred, in
accordance with the agreed-upon delivery terms. Revenues from services are derived mainly from the sale of print heads, spare parts,
upgrade kits and sale of service contracts. The Company’s print heads, spare parts and upgrade kits revenues (collectively “Spare parts”) are
recognized at the point of time when control has transferred, in accordance with the agreed-upon delivery terms. Service contracts are
recognized over time, on a straight-line basis, over the period of the service.
For multiple performance obligations arrangements, such as selling a system with service contract, installation and training, the Company
accounts for each performance obligation separately as it is distinct. The transaction price is allocated to each distinct performance
obligation on a relative standalone selling price (“SSP”) basis and revenue is recognized for each performance obligation when control has
passed. In most cases, the Company is able to establish SSP based on the observable prices of services sold separately in comparable
circumstances to similar customers and for products based on the Company’s best estimates of the price at which the Company would have
sold the product regularly on a stand-alone basis. The Company reassesses the SSP on a periodic basis or when facts and circumstances
change.
The Company periodically provides customer incentive programs in the form of product discounts, volume-based rebates and warrants (see
also note 10f), which are accounted for as a variable considerations that are deducted from 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 according to historical
experience and the specific terms and conditions of the incentive.
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 which is estimated, based primarily on historical experience as well as management judgment, and is
recorded as reduction of revenue. Such provision amounted to $570 as of December 31, 2018 and is included in accrued expenses and other
current liabilities in the consolidated balance sheet. Under Topic 605, the provision of $580 as of December 31, 2017 was presented as a
reduction to trade receivables.
Contract liabilities include amounts received from customers for which revenue has not yet been recognized. Contract liabilities amounted
to $2,090 and $3,931 as of December 31, 2017 and 2018, respectively and are presented under deferred revenues and advances from
customers and other long term liabilities. During the year ended December 31, 2018, the Company recognized revenues in the amount of
$1,232 which have been included in the contract liabilities at January 1, 2018.
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.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
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.
Revenue disaggregated by revenue source for the years ended December 31, 2016, 2017 and 2018, consists of the following:
Systems
Ink and consumables
Spare parts
Service contracts
Total revenue
Year ended December 31,
2017
2016
2018
$
57,894 $
42,834
6,168
1,708
50,498 $
51,455
9,652
2,483
65,825
59,904
12,377
4,267
$
108,694 $
114,088 $
142,373
The following table presents revenue disaggregated by geography based on customer location:
U.S
EMEA
Asia Pacific
Other
Total revenue
Year ended December 31,
2017
2016
2018
$
63,656 $
24,720
11,963
8,355
60,541 $
32,015
16,092
5,440
77,652
45,195
15,572
3,954
$
108,694 $
114,088 $
142,373
Remaining performance obligations represents contracted revenues that have not yet been recognized, which includes deferred revenues and
non-cancelable contracts that will be invoiced and recognized as revenue in future periods. The following table represents the remaining
performance obligations as of December 31, 2018, which are expected to be satisfied and recognized in future periods:
Product
Services
Total
2019
2020
172 $
4,617
- $
1,201
2021 and
thereafter
-
55
4,789 $
1,201 $
55
$
$
The Company elected to apply the optional exemption under paragraph 606-10-50-14(a) not to disclose the remaining performance
obligations that relate to contracts with an original expected duration of one year or less for which deferred revenues have not been recorded
yet.
F-16
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
m. Shipping and Handling:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
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, 2016, 2017 and 2018
were $768, $1,355 and $1,702, 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, royalties and shipping and handling fees.
o. Warranty costs:
The Company typically provides assurance type warranty for one-year 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, 2017 to December 31, 2018:
Balance at January 1, 2017
Provision for warranties issued during the year
Reduction for payments and costs to satisfy claims
Balance at December 31, 2017
Provision for warranties issued during the year
Reduction for payments and costs to satisfy claims
Balance at December 31, 2018
p.
Research and development expenses:
$
2,019
2,807
(3,049)
1,777
3,381
(2,921)
$
2,237
Research and development expenses are charged to the statement of income, as incurred.
q.
Restructuring:
Restructuring consists of costs primarily related to early retirement or retention agreements with employees of the Company’s Wisconsin
facility in connection with the transition of its U.S headquarters to the East Coast in the United States.
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.)
r.
Accounting for share-based compensation:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
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 operations.
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, 2016, 2017 and 2018:
Suboptimal exercise multiple
Risk free interest rate
Volatility
Dividend yield
Year ended December 31,
2017
2016
2018
1.0-1.5
0.3%-2.2%
54%-56%
0%
1.0-1.5
2.2%-2.3%
51%-53%
0%
1.0-1.5
2.0%-3.1%
47%-51%
0%
The expected volatility is based on volatility of the Company’s share price and 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.
F-18
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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 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.
2. 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 options are exercised or RSU’s vests.
3.
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.
F-19
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
s.
Derivatives and hedging:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
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, 2017 and 2018, the fair value
of the Company’s outstanding forward and option contracts amounted to $45 and $(111) which is included within “Other accounts
receivable and prepaid expenses” and “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, 2017, and 2018, the Company had outstanding hedging contracts in the notional amount of $3,651 and $10,581,
respectively.
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.)
t.
Advertising:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Advertising costs are charged to operations as incurred and were $526, $612 and $1,077 for the years ended December 31, 2016, 2017 and
2018, 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-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.)
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 amounting to $216, $97 and $19 were recorded
for the years ended December 31, 2016, 2017 and 2018, 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 and Garden leave pay expenses for the years ended December 31, 2016, 2017 and 2018 were $1,590, $2,088 and $3,124
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-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
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 - Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at
the measurement date.
Level 2 - 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 marketable securities and unrealized gain and losses from foreign currency
translation adjustments.
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.)
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”.
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 1,498,503 and 884,028 for the years ended December 31, 2016 and 2018, respectively. 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.
aa. Recently adopted accounting standard:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance related to revenue recognition: “Revenue from
Contracts with Customers” (“ASC 606”), which outlines a comprehensive revenue recognition model and supersedes most current revenue
recognition guidance. The Company adopted ASC 606 on January 1, 2018, using the modified retrospective transition method applied to
those contracts which were not completed as of January 1, 2018. The new standard application had no material effect on the pattern of
revenue recognition, nevertheless, the revenue recognition disclosure has been adjusted in accordance to ASC 606 guidance. See Revenue
Recognition above for further details.
bb.
Impact of recently issued accounting standard and not yet adopted:
1.
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02 (Topic 842)
“Leases.” Topic 842 supersedes the lease requirements in Accounting Standards Codification (ASC) Topic 840, “Leases.” Under Topic
842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures.
Leases will continue to be classified as either finance or operating. This ASU is effective for annual periods beginning after December
15, 2018. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. In July 2018, the FASB issued
Accounting Standards Update 2018-11, Leases (Topic 842). This update provides entities with an additional (and optional) transition
method to adopt the new leases standard. Under this method, an entity initially applies the new leases standard at the adoption date and
recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the
prior comparative period’s financials will remain the same as those previously presented.
F-24
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 has elected to apply the guidance at the beginning of the period of adoption and not restate comparative periods. In
addition, the Company elected the available practical expedients on adoption.
The Company expect to record right-of-use leased assets and corresponding liabilities of approximately $15,000 at January 1, 2019.
2.
3.
4.
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 currently evaluating
the potential effect on its 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,
with early adoption permitted. The Company does not expect that this new guidance will have a material impact on the Company’s
Consolidated Financial Statements.
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 does not expect that this new guidance will have a material impact on the Company’s Consolidated Financial
Statements.
F-25
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
5.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which
currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or
services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This
ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The guidance is effective for the interim and
annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the potential
effect on its 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 $2,470, $1,234 and $303 as of December 31, 2016, 2017 and 2018, 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-26
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:
Matures within one year:
Corporate debentures
Matures after one year through three years:
Corporate debentures
Government debentures
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
December 31, 2018
Gross
unrealized
gain
Gross
unrealized
loss
Amortized
cost
Fair value
$
3,999 $
3,999
- $
-
(18) $
(18)
3,981
3,981
33,698
11,360
45,058
29
-
29
(346)
(138)
(484)
33,381
11,222
44,603
Total
$
49,057 $
29 $
(502) $
48,584
Matures within one year:
Corporate debentures
Government debentures
Matures after one year through three years:
Corporate debentures
Government debentures
December 31, 2017
Gross
unrealized
gain
Gross
unrealized
loss
Amortized
cost
Fair value
$
5,190 $
295
5,485
56,514
12,403
68,917
50 $
12
62
137
8
145
(9) $
(1)
(10)
5,231
306
5,537
(202)
(25)
(227)
56,449
12,386
68,835
Total
$
74,402 $
207 $
(237) $
74,372
Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:
Corporate debentures
Government debentures
Total
Less than 12 months
December 31, 2018
12 months or greater
Total
Fair value
Unrealized
Losses
Fair value
Unrealized
Losses
Fair value
Unrealized
Losses
$
12,017 $
8,864
(126) $
(117)
16,547 $
2,357
(238) $
(21)
28,564 $
11,221
(364)
(138)
$
20,881 $
(243) $
18,904 $
(259) $
39,785 $
(502)
F-27
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.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Corporate debentures
Government debentures
Total
Less than 12 months
December 31, 2017
12 months or greater
Total
Fair value
Unrealized
Losses
Fair value
Unrealized
Losses
Fair value
Unrealized
Losses
$
43,852 $
2,854
(211) $
(26)
- $
-
- $
-
43,852 $
2,854
(211)
(26)
$
46,706 $
(237) $
- $
- $
46,706 $
(237)
The below table sets forth the Company’s assets and liabilities that were measured at fair value as of December 31, 2018 and December 31, 2017
by level within the fair value hierarchy.
Assets:
Marketable securities
Total financial assets
Liabilities:
Foreign currency derivative contracts
Total liabilities
Assets:
Marketable securities
Foreign currency derivative contracts
Total financial assets
Liabilities:
Payment obligation related to acquisition
Total liabilities
December 31, 2018
Level 1
Level 2
Level 3
Total
- $
48,584 $
- $
48,584
- $
48,584 $
- $
48,584
- $
- $
111 $
111 $
- $
- $
111
111
December 31, 2017
Level 1
Level 2
Level 3
Total
- $
-
74,372 $
45
- $
-
74,372
45
- $
74,417 $
- $
74,417
- $
- $
- $
- $
334 $
334 $
334
334
$
$
$
$
$
$
$
$
F-28
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.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
The following table set forth the change of fair value measurements that are categorized within Level 3:
Total fair value as of January 1, 2018
Settlement of payment obligation *)
Accretion of payment obligation
Reversal of payment obligation **)
Total fair value as of December 31, 2018
$
$
334
(303)
44
(75)
0
$303 is included within other payables and accrued expenses on the balance sheet.
*)
**) The set milestone was met only at 76% as of December 31, 2018. The reversal of payment obligations was recognized in operating
expenses.
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.
Accretion of the payment obligation related to acquisition is included in financial expenses, net.
NOTE 5:- INVENTORIES
Raw materials and components
Finished products (*)
December 31,
2017
2018
$
15,756 $
19,099
17,425
12,605
$
34,855 $
30,030
(*)
Including amounts of $34 and $836 for the years ended December 31, 2017 and 2018, respectively, with respect to inventory delivered to
customers for which revenue was not yet recognized.
F-29
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:- PROPERTY, PLANT AND EQUIPMENT, NET
Cost:
Computer and peripheral equipment
Office furniture and equipment
Machinery and equipment
Leasehold improvements
Building and land
Accumulated depreciation
Property, plant and equipment, net
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
December 31,
2017
2018
$
2,616 $
1,497
11,098
7,022
-
3,182
1,757
12,230
8,505
3,343
22,233
29,017
(11,003)
(14,023)
$
11,230 $
14,994
Depreciation expenses for the years ended December 31, 2016, 2017 and 2018 were $2,447, $3,505 and $3,900 respectively.
During the years ended December 31, 2016, 2017 and 2018, the Company recorded a reduction of $297, $298 and $861, respectively to the cost
and accumulated depreciation of fully depreciated equipment no longer used.
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
Weighted
average
amortization
period
December 31,
Years
2017
2018
$
8.14
5
4
1,566 $
2,614
265
1,566
2,614
265
$
4,445 $
4,445
866
1,404
99
966
2,302
166
2,369
3,434
Intangible assets, net
$
2,076 $
1,011
Amortization expenses for the years ended December 31, 2016, 2017 and 2018 were $519, $1,309 and $1,065, respectively.
F-30
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 7:- INTANGIBLE ASSETS, NET (Cont.)
b.
Future amortization expenses for the years ending:
December 31,
2019
2020
2021
2022
2023 and thereafter
NOTE 8:- OTHER PAYABLES AND ACCRUED EXPENSES
Government authorities
Warranty provision
Professional services
Payment obligation related to acquisition
Restructuring
Provision for return
Accrued expenses
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
$
432
136
143
100
200
$
1,011
December 31,
2017
2018
$
867 $
1,680
470
900
503
-
626
253
1,909
412
303
-
570
1,546
$
5,046 $
4,993
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Lease commitments:
The Company leases facilities and vehicles under operating leases that expire on various dates through 2028. Aggregate minimum lease and
rental payments under non-cancelable operating leases as of December 31, 2018, are (in the aggregate) and for each succeeding fiscal year
below:
December 31,
2019
2020
2021
2022
2023 and thereafter
$
2,549
2,415
2,114
1,998
5,335
$
14,411
Total rent expenses for the years ended December 31, 2016, 2017 and 2018 were $1,664, $2,963 and $2,663, respectively.
F-31
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.)
b.
Charges:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
As of December 31, 2018, 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, 2018. 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, 2018, the Company has not utilized its line of credits.
c.
Purchase commitments:
As of December 31, 2018, the Company has $12,596 of purchase commitments for goods and services from vendors. These commitments
are due primarily within one year.
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.
e.
Royalty Commitments:
Under the Company’s agreement for purchasing print heads and other products, which was amended in 2016, the Company is obligated to
pay 2.5% royalties of its annual ink revenues up to an annual maximum amount of $625.
Royalties expenses for the years ended December 31, 2016, 2017 and 2018 were $625.
f.
Guarantees:
As of December 31, 2018, the Company provided two bank guarantees of $370 in the aggregate for its rented facilities.
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
a.
Company’s shares:
1. Ordinary shares:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
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. 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.
3. On May 15, 2017 and December 7, 2018, the Company made additional underwritten secondary offerings of 4,250,000 and 3,132,481
ordinary shares respectively, by the Company’s major shareholder. The Company did not receive any of the proceeds from the sale of
these ordinary shares.
b.
Share option and RSU’s plans:
A summary of the Company’s share option activity and related information is as follows:
Number
of shares
upon
exercise
Weighted
average
exercise
price
Weighted-
average
remaining
contractual
term
(in years)
2,360,647 $
449,276
(918,380)
(307,979)
10.76
18.69
6.82
13.54
8.05 $
9.53
6.45
7.95
Aggregate
intrinsic
value
13,588
1,583,564 $
14.71
8.19 $
6,536
619,711 $
12.37
7.42 $
4,011
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
F-33
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
As of December 31, 2018, $8,029 in unrecognized compensation cost related to share options is expected to be recognized over a weighted
average vesting period of 2.89 years.
The weighted average fair value of options granted during the years ended December 31, 2016, 2017 and 2018 were $5.64, $9.24 and $9.5
per share, respectively. The weighted average fair value of options vested during the year ended December 31, 2018 was $6.71. The total
intrinsic value of options exercised during the years ended December 31, 2016, 2017 and 2018 were $7,822, $10,588 and $11,775,
respectively.
c.
The options outstanding as of December 31, 2018, have been classified by exercise price, as follows:
Options outstanding
at December 31, 2018
Options exercisable
at December 31, 2018
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
0.36-2.17
9.38-9.97
10.05-11.90
13.4-15.29
15.80-18.05
18.8-21.15
71,035
122,770
356,546
149,185
423,989
460,039
1,583,564
2.05
9.93
10.24
14.48
17.52
18.91
5.81
6.04
7.57
7.08
8.69
9.53
71,035
112,259
142,766
104,014
118,360
71,277
619,711
2.05
9.97
10.11
14.53
17.62
19.06
5.81
5.96
7.52
7.22
8.66
9.4
A summary of the Company’s RSUs activity is as follows:
Unvested at beginning of year
Granted
Vested
Forfeited
Unvested at the end of the year
Number
of RSUs
88,759
370,417
(22,597)
(22,159)
414,420
The weighted average fair values at grant date of RSUs granted for the years ended December 31, 2017 and 2018 were $17.77 and $17.1,
respectively. The total fair value of shares vested during the year ended December 31, 2018 was $421.
F-34
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
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. 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 2018, the Board of Directors approved an increase in the ordinary shares reserved for issuance to 5,376,368 ordinary shares. As of
December 31, 2018, an aggregate of 1,960,465 ordinary shares were available for future grants.
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, 2016, 2017 and 2018:
Cost of products
Cost of services
Research and development
Sales and marketing
General and administrative
Year ended
December 31,
2017
2018
2016
$
311 $
171
217
654
1,640
419 $
210
775
920
2,087
494
398
1,022
1,240
2,392
Total share-based compensation expense
$
2,993 $
4,411 $
5,546
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 at an exercise price of $13.04 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. As of December 31,
2018, 1,111,773 warrants are exercisable.
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 exercise price, estimated ordinary share price volatility and risk-free interest rate, among others. The Company
recognized a reduction to revenues of $2,030, $2,895 and $4,576 during the years ended December 31, 2016, 2017 and 2018, respectively.
F-35
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,
2017
2018
2016
Numerator for basic and diluted net earnings (losses) per share:
Net income (loss)
$
828 $
(2,015) $
12,429
Weighted average shares outstanding:
Denominator for basic net earnings (losses) per share
Effect of dilutive securities:
Employee share options and restricted share units
30,562,255 33,574,147 34,521,352
1,170,277
-
842,352
Denominator for diluted net earnings (losses) per share
31,732,532 33,574,147 35,363,704
Basic net earnings (losses) per share
Diluted net earnings (losses) per share
$
$
0.03 $
(0.06) $
0.03 $
(0.06) $
0.36
0.35
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
$
(30) $
(887)
45 $
(230)
286 $
6
301
(1,111)
480
92
-
6
572
(539)
(238)
Year ended December 31, 2018:
Beginning balance
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
(loss)
Net current period other comprehensive income (loss)
(407)
(138)
Ending Balance
$
(437) $
(93) $
292 $
F-36
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, 2017:
Beginning balance
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive income
$
(loss)
(100) $
104
3 $
436
15 $
271
(82)
811
(34)
(394)
-
(428)
Net current period other comprehensive income
70
42
271
Ending Balance
$
(30) $
45 $
286 $
383
301
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: 2016: 25%, 2017: 24% and 2018: 23%.
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.
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.
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
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, 2018, tax-exempt income of $100,920 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 $23,212 would be incurred as of December 31, 2018.
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.
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.
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.)
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
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%).
Pursuant to Amendment 73 to the Investment Law adopted in 2017, a Company that meets the conditions for “Preferred Technological
Enterprises”, is subject to tax rate of 12%.
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.
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.
F-39
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 amount of undistributed earnings of foreign subsidiaries that are considered to be reinvested as of December 31, 2018 was $7,240. If
these undistributed earnings are distributed, they would be taxed at the corporate tax rate applicable to such income, and $587 would be
incurred as of December 31, 2018.
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 re-measured its U.S. deferred tax assets and liabilities, based on the new rates at which they are
expected to reverse in the future. The tax expense recorded in 2017, related to the re-measurement of the deferred tax balance was $355.
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 2012 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 $58,243 as of December 31,
2018 and may be used indefinitely.
F-40
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
Share-based compensation
R&D expenses
Other temporary differences
Deferred tax assets
Deferred tax liability due to property, plant and equipment
Valuation allowance
Deferred tax assets, net
$
December 31,
2017
2018
3,764 $
424
1,331
552
3,538
976
1,414
1,354
6,071
7,282
(4)
(5,503)
(10)
-
$
564 $
7,272
The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. As of each reporting
date, management considers new evidence, both positive and negative, that could impact management’s view with regards to the future
realization of deferred tax assets for each jurisdiction. During the year ended December 31, 2018, the Company released $5,503 of
valuation allowance against the deferred tax assets primarily related to NOL carryforwards.
Income (loss) before income taxes is comprised as follows:
Domestic
Foreign
Income (loss) before income taxes
F-41
Year ended
December 31,
2017
2018
2016
$
$
(507) $
1,983
(3,328) $
1,697
4,458
2,579
1,476 $
(1,631) $
7,037
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.)
h.
Taxes on income are comprised as follows:
Current taxes
Deferred taxes
Domestic
Foreign
Domestic taxes:
Current taxes
Deferred taxes
Foreign taxes:
Current taxes
Deferred taxes
Taxes on income
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Year ended
December 31,
2017
2018
2016
829 $
(181)
509 $
(125)
1,088
(6,480)
648 $
384 $
(5,392)
(70) $
718
(594) $
978
(6,050)
658
648 $
384 $
(5,392)
Year ended
December 31,
2017
2018
2016
(70) $
-
(594) $
-
333
(6,383)
(70)
(594)
(6,050)
$
$
$
$
$
899
(181)
1,103
(125)
718
978
755
(97)
658
$
648 $
384 $
(5,392)
F-42
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.
Uncertain tax positions:
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
Beginning of year
Increases related to tax positions taken during prior years
Decreases related to expiration of statute of limitations
Increases related to tax positions taken during the current year
Cumulative translation adjustments and other
Balance at December 31 *)
December 31,
2017
2018
$
1,691 $
-
(594)
218
206
1,521
452
-
313
(46)
$
1,521 $
2,240
*) As of December 31, 2017, and 2018 unrecognized tax benefit in the amount of $905 and $1,218 were presented as a reduction from
deferred taxes.
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, 2016, 2017 and 2018, an amount of $0, $54 and $115, 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,
2017, and 2018, the Company had accrued interest related to uncertain tax positions in the amounts of $60 and $171, 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-43
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
j.
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,
2017
2018
2016
Income (loss) before taxes, as reported in the consolidated statements of income
$
1,476 $
(1,631) $
7,037
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 (*)
Increase (Decrease) in other uncertain tax positions
Other
369
114
140
318
716
240
(1,190)
(70)
11
(392)
111
143
1,899
996
355
(2,360)
(376)
8
1,618
43
64
(5,503)
1,161
-
(3,469)
765
(71)
Actual tax expense (benefit)
$
648 $
384 $
(5,392)
(*) Basic and diluted earnings per share amounts of the benefit resulting from the
“Beneficiary Enterprise” status
0.04
0.07
0.10
F-44
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 following table presents long-lived assets by geographic region as of December 31, 2017 and 2018:
U.S
Israel
EMEA
Asia Pacific
December 31,
2017
2018
$
232 $
10,342
378
278
1,839
12,581
328
246
$
11,230 $
14,994
Major customers’ data as a percentage of total revenues:
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
F-45
Year ended
December 31,
2017
2018
2016
21%
16%
18%
13%
15%
17%
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- SELECTED STATEMENTS OF INCOME DATA
Financial income, net:
Financial income:
Interest on bank deposits and other
Exchange rate differences, net
Realized gain on sale of marketable securities, net
Interest on marketable securities
Financial expenses:
Bank charges
Exchange rate differences, net
Realized loss on sale of marketable securities, net
Amortization of premium and accretion of discount on marketable securities, net
KORNIT DIGITAL LTD. AND ITS SUBSIDIARIES
Year ended
December 31,
2017
2018
2016
$
203 $
-
6
1,046
69 $
-
34
1,896
406
87
-
2,107
1,255
1,999
2,600
(277)
(478)
-
(454)
(244)
(757)
-
(546)
(299)
-
(480)
(388)
(1,209)
(1,547)
(1,167)
Total financial income:
$
46 $
452 $
1,433
F-46
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. Acord Insurance Agency Ltd. (“Acord”)
Acord is an insurance company which is owned, in part, by the Chairman of the Board. Starting December 1, 2017, the Company entered a
one-year business and professional insurance contract with Acord, which was renewed for additional one-year period on December 1, 2018.
The total annual premium under the contract is $248.
2.
Priority Software Ltd. (“Priority”)
Priority is the Company’s ERP solution provider, which is owned, in part by few of the Company’s Board members. 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 additional licenses was $58. During the years ended December 31, 2016, 2017 and 2018 maintenances fees amounted to $8, $32 and
$30, respectively.
NOTE 17:- SUBSEQUENT EVENT
On February 7, 2019 (the “Closing Date”), the Company has closed a definitive asset purchase agreement with Hirsch Solutions Inc., the
Company’s primary distributor in the United States and Canada, which accounted for 21%, 18% and 15% of its revenues in the years ended
December 31, 2016, 2017 and 2018, respectively, to purchase the Company’s remaining business assets related to the distribution agreement
between the companies for a total consideration of $4,715.
- - - - - - - - - - - - - - - - - - - -
F-47
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”), (xii) the Addendum dated February 21, 2018 (the “Ninth Addendum”), (xiii) an Addendum to the Lease Agreement dated April 23, 2018 (the
“Tenth Addendum”) and (xiv) Addendum to the Lease Agreement dated January 3, 2019 (the “Eleventh 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 eighty four (184) 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
December 17, 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
Included in Sixth
Addendum Below
Guarantees* Comments
Included in
Sixth
Addendum
Below
First Parking Space
Addendum
Second Parking Space
Addendum
First Addendum March 8,
2012
-
-
-
-
463
5,000
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Third Parking Space
Addendum”
Second Addendum December
19, 2012
-
414
-
4,400
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Third Addendum May 20,
2013
169 + 205
4,000
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Fourth Addendum January 12,
2014
85
900
Included in Sixth
Addendum Below
Included in Sixth
Addendum Below
Fifth Addendum January 12,
2014
745
8,000
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
3
Space
that
has been
leased
in square
meters
(gross)
Space
that
has been
leased
in square
feet
Sixth Addendum December 27,
2015
-
-
Seventh Addendum
December 12, 2015
2,918
31,409
Eight Addendum October 17,
2017
7,698
Parking
space that
has been
leased
Total 145
parking
spaces
Rental fees
regarding
parking space
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
Guarantees* Comments
Aggregate
bank guarantee
of NIS 832,699
and promissory
note of NIS
3,330,279
Total 169
parking
spaces
(i) bank
guarantee in
the amount of
NIS 546.933
and (ii) two
promissory
notes in the
amount of NIS
2,187,730 each
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.
Rental fees for
the leased space.
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.
4
Space
that
has been
leased
in square
meters
(gross)
25.2
Space
that
has been
leased
in square
feet
Ninth Addendum February 21,
2018
Parking
space that
has been
leased
Rental fees
regarding
parking space
Guarantees* Comments
Rental fees for
the leased space.
February 25, 2018
– December 31,
2020 – NIS 36 per
square meter.
January 1, 2021 –
December 31,
2025 – NIS 37.8
per square meter.
Additional
management fees
– NIS 13 per
square meter.
Tenth Addendum April 23,
2018
Eleventh Addendum
January 3, 2019
0
0
NA
15
Correcting a
typographical
error in the
Ninth
Addendum
with respect to
the term of the
option.
15 parking spaces
- NIS 350 per
space.
All fees are linked
to the November
2018 CPI and
exclude VAT.
5
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, an Addendum dated September 16,
2014, an Addendum dated March 16, 2015, an Addendum dated August 31, 2017 and an Addendum dated June 24, 2018 (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:
o
o
The term of the Original Lease Agreement was 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.
o
The Company exercised its right to extend the Original Lease Period.
● Addendums to the Original Lease Agreement:
o 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 ”).
o
o
The term of the Additional Premises 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.
o On September 16, 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.
o 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) year period,
ending on May 31, 2021.
o On August 31, 2017 the Company and the Landlord agreed that the lease of the Original Premises and Additional 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) years 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.
o On June 24, 2018, the Company and the Landlord signed an additional Addendum to the Original Lease in which the Company leased
additional premises (the “Second Premises” and together with the Original Premises and the Additional Premises, the “Premises”) and
four more parking spaces.
● Premises Covered by the Lease Agreement:
o 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.
o
In addition, beginning in November 2011, the Company leased the Additional Premises, which are comprised of 291 square meters (gross)
(approximately 3,100 square feet).
o On June 24, 2018, the Company leased the Second Premises, which are comprised of 400 square meters (gross) (approximately 4,305
square feet).
● Rental Fees:
o 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”).
o
o
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 on 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.
o
In all cases, rental fees shall be increased (but not decreased) based on changes to the Israeli Consumer Price Index.
o Under the terms of the Addendum dated June 24, 2018, the rental fees for the Second Premises are NIS 32.5, plus VAT, per square
meter. During the period between June 1, 2021 and May 31, 2024 the rent will increase by 2% compared to the Updated Basic Rental Fee
in the previous year.
● Guarantees:
o 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 an 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 the Lease Agreement and for
sixty (60) days thereafter; and (iii) a cash deposit equal to two (2) months’ rental fee.
● Other Terms under the Lease Agreement:
o
o
o
o
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
File No: A10733433
Account No: 971867544
DEVELOPMENT CONTRACT
Capitalized
Drawn up and signed at Jerusalem on the 26th day of November 2018
on the 18th day of Kislev 5779
between
Israel Lands Authority, which manages the lands of the State of Israel, the Development Authority and the Jewish National Fund (hereinafter – the Authority),
whose address for the purpose of this contract is: Shaarei Ha'Ir, 216 Jaffa Road, 6th Floor, Jerusalem
of the one part
and
Kornit Digital Identification/Corporation No. 513195420
(hereinafter – the developer),whose address for the purpose of this contract is:
37 Israel Polk Boulevard, Kiryat Gat
of the other part
Preamble
which forms an integral part of the terms of the development contract attached to it and which only together constitute the contract
Whereas the meaning of the terms in this contract shall be as stated below in this preamble, unless the context necessitates another meaning in accordance
with the contract:
"the plot": the plot described in the attached plan, which forms an integral part of this contract, and the details of which are:
Location: Kiryat Gat Area: Approximately 10,984 m2
Registered Block: 3027 Parcels: 14 (in part), 23 (in part)
Plot(s) No. 153, according to Detailed Plan No. 257/02/6
"the buildings": development and manufacture of printing systems
"date of approval of the transaction": the date on which the transaction which is the subject of this contract was approved by the management of the Authority,
namely 17.09.2018
"the development period": 48 months, commencing on the date of approval of the transaction and terminating on 17.09.2022
"the long lease period": 49 years, from the date of approval of the transaction
"purpose of the allocation": development and manufacture of printing systems
"the zoning": according to the abovementioned Plan, namely:
Industrial area
"land to building ratio": the building capacity permitted under the abovementioned Plan, namely ___ percent per floor, on ____ floors, and in total ____
percent, which constitutes ____ units and amounts to a total of 23,615.6 m2 built-up
"the basic value of the plot": the value of the plot on the date of approval of the transaction, namely NIS 11,675,139.45 (eleven million six hundred and
seventy-five thousand one hundred and thirty-nine NIS + 45 agorot)
"the base index": the last consumer price index known on the date of approval of the transaction
"the consideration":
The sum of NIS 7,962,445.10. This payment shall be deemed to be payment for capitalized annual usage fees for the use of the plot for the
long lease period as defined in the long lease contract attached hereto.
Page 2 of 15
15:01:46 07/11/2018
Israel Lands Authority
The developer is aware that "the consideration" as defined in this contract constitutes payment for a main built-up area in the amount of 23,615.6
m2 as set out above, and that in return for the Authority's approval of an increase in the building capacity or any change as a result of which the
value of the land which is the subject of this contract will increase as a consequence of the change, whether by way of concession or by way of
alteration of a detailed plan or in any other way, the Authority is entitled, inter alia, to an additional consideration in an amount to be determined by
the Authority from time to time.
To remove doubt, the developer shall pay value-added tax in accordance with the law which applies to each of the abovementioned payments at the rate of
value-added tax on the date of payment thereof.
"the date of submission of the plans": not later than after 9 months have elapsed from the date of approval of the transaction
"the date of commencement of construction": not later than after 18 months have elapsed from the date of approval of the transaction
"the date of completion of casting the foundations": not later than 17.09.2020
"the date of completion of the skeleton": not later than 17.09.2021
"the date of completion of construction": the date of the end of the development period
And whereas the State of Israel/ the Development Authority is the owner of the plot;
And whereas the Authority will be prepared to let the plot to the developer by long lease on the prior condition that and only after the developer develops the
plot and builds the buildings on it within the development period for them to be used for the purpose of the allocation and on condition that it fulfills all the
other terms of this contract;
And whereas the Authority is prepared to make the plot available to the developer for the development period only, and only for the purpose of construction
of the buildings for the purpose of the allocation in accordance with the zoning and the land to building ratio, all as defined above, and the developer agrees to
accept the plot on the said terms;
And whereas the developer hereby declares that it is not subject to any restriction in contracting with the Authority by this development contract under the
provisions of clause 12(c) of this development contract and that it is aware that the Authority is only prepared to contract with it under this development
contract on this prior and fundamental condition;
And whereas if the developer is recognized by the Authority as a contractor, as defined in sub-clause 3(e) of this contract, the Authority will agree that it shall
be permitted, within one year only from the end of the development period, to transfer its rights to the party for whom the developer constructed buildings or
apartments on the plot, but this is subject to the provisions of sub-clause 3(e) of this contract and subject to the condition that if the purpose of the allocation
is for industry or trades or tourism a recommendation shall be given by the Ministry of Industry and Trade or the Ministry of Tourism, as the case may be, for
the abovementioned transfer of rights.
And whereas if the developer is more than one person or corporation, the obligations of the persons or corporations constituting the developer shall be joint
and several, but their rights under this contract shall only be joint;
And whereas in addition to the terms of the development contract below the following special terms shall apply:
1.
2.
3.
4.
5.
6.
The developer/long-term lessee is aware that in accordance with the Ministry of Economy's recommendation for exemption from tender the
minimum construction size has been fixed at 4,195 m2 main area Construction of 4,195 m2 main area shall be deemed by the Authority to be
compliance with the terms of the development agreement and shall enable conversion of this agreement into a long lease contract.
The developer/long-term lessee is aware that the allocation is based on the Ministry of Economy's recommendation for exemption from tender
for the purpose of industry, as stated in the Mandatory Tenders Law Regulations, 5753-1993 (Regulation 25(5)(b)). The Authority shall not
enable and shall not permit any other use of the property being let by long lease before 7 years have elapsed from the date of signature of the
long lease contract.
The developer/long-term lessee is aware that the infrastructure and development works are being performed by the Ministry of Economy
(hereinafter: "the ITL"/ the development company") and at their full liability.
The developer/long-term lessee declares and undertakes that it does not and shall not have any claims or actions against the Israel Lands
Authority (hereinafter: "the Authority") in anything concerning the nature of the works and/or the timetables and performance of them
and/or concerning the size of the amounts which it is required to pay the Ministry of Economy, and if it has claims with regard to those
matters it undertakes not to address them to the Authority.
The developer/long-term lessee hereby confirms that it has seen and examined the Town Plan and its documents and that the provisions and
determinations of the Town Plan are the ones which are binding with regard to the permitted planning data in this contract. The
developer/long-term lessee declares that it is aware that in any case where it is not possible to utilize the maximum building rights defined in
the Town Plan, whether because of the restrictions of the Town Plan or because of instructions given by (the local authority) and/or the
Planning and Building Committees, the most restrictive provisions shall apply and the developer/long-term lessee shall not be able to revert to
the Authority with any claim or action.
Any additional utilization of any kind beyond the building capacity permitted under the Town Plan, whether of main areas or service areas,
shall necessitate an additional payment to the Authority at a rate which shall be determined by the Authority from time to time, whether the
additional utilization arises from concession, change of detailed plan or in any other way.
The purpose of the allocation is industry only and does not include a petrol station or other commercial use.
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Israel Lands Authority
7.
8.
9.
10.
The developer/long-term lessee is aware that the transition from development agreement to long lease contract is conditional upon receipt of
the Ministry of Economy's authorization after completion of the construction and occupation.
The developer/long-term lessee is aware that according to data of the Registrar of Lands there is a servitude and that Parcel 8 of Block 3027 is
a parcel subject to a right of way and that it shall not bring any claim and/or action and/or demand in this regard.
The developer/long-term lessee is aware that the plot which is the subject of this contract known as Parcel 23 of Block 3027 was declared as an
antiquities site in Official Notices Gazette 7500 published on 9/5/2017. The developer/long-term lessee undertakes to solely bear the cost of the
supervision, test excavations and rescue excavations as required in accordance with the determination of the Antiquities Authority and it will
not bring any claim and/or action against the Authority in connection with antiquities.
All the aforesaid is in addition to performance of the other terms of the development agreement.
Therefore this development contract was drawn up and signed in accordance with the provisions of this preamble and in accordance with the terms
of the development contract below:
The parties' signatures
by initials:
The Authority
The Developer
TERMS OF THE DEVELOPMENT CONTRACT
1.
2.
3.
The preamble and the documents attached to the contract
The preamble and the documents attached to this contract form an integral part thereof.
Purpose and period of the development authorization
The Authority hereby makes the plot available to the developer and the developer hereby accepts the plot, for the development period only, for
development thereof and construction of the buildings as stated in the preamble to this contract and in accordance with the plans which will be
approved by the Authority and the competent authorities.
Signature of long lease contract
(a)
If the developer fulfills its obligations under this contract, and on the dates fixed for this in the contract, the Authority undertakes to sign, with
the developer alone, and the developer undertakes to sign with the Authority, a long lease contract (hereinafter – the long lease contract) for the
plot and the buildings.
(b)
The long lease contract shall state that:
(1) The long lease period, land to building ratio, the basic value of the plot and the base index under the long lease contract shall be as stated in
this development contract.
(2) The purpose of the long lease shall be identical to the purpose of the allocation as stated in this development contract.
(3) The payments made to the Authority under clause 4 of this development contract shall be deemed to be payment on account of the land
leasing fees which shall be due to the Authority under the long lease contract.
(4) The date of approval of the transaction shall be deemed to be the beginning of the long lease period for all purposes, including for the
purpose of the dates under the long lease contract, and for the purpose of possession, liability for damages and payments for taxes,
compulsory payments and development expenses.
(c)
The other long lease terms shall be the same as the terms of the attached long lease contract.
(d) Without derogating from the aforesaid, on the date of signature of this development contract the developer undertakes to sign the attached long
lease contract. The long lease contract shall only come into effect after the Authority also signs it and only if the developer fulfills its obligations
under this development contract, and on the dates fixed for this in this contract. Until the Authority signs the long lease contract its terms shall
not bind the parties and the signature of the developer alone on the long lease contract shall not give it any right thereunder. The date on which
the Authority signs the long lease contract shall be deemed to be the date of signature of that contract.
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Israel Lands Authority
Notwithstanding the provisions of this clause 3 above, if the developer is a "contractor" - as defined below- it shall be permitted, within one year
only from the end of the development period, to transfer its rights to the party for whom the developer constructed buildings or apartments on
the plot, and who shall be referred to the Authority by the developer. In this case the Authority, within the aforesaid year only, shall sign the long
lease contract with regard to the plot and the buildings or with regard to the apartments which are constructed on the plot, as the case may be,
with the party referred to it by the developer as aforesaid – on condition that all the following are fulfilled:
(1) The developer has fulfilled its obligations under this development contract
(2) This development contract has not been cancelled for any reason
(3) The party referred to the Authority as aforesaid is not subject to any restriction under the provisions of clause 12(c) below with regard to
contracting with the Authority by a long lease contract and every prior and fundamental condition in the preamble to this contract is met by
that party.
Subject to all the abovementioned conditions in this sub-clause, the contractor shall not be obliged to sign the long lease contract itself, and on
the date of signature of this development contract it may initial the attached long lease contract, which shall serve as an example only of the long
lease contract which will be signed as stated above in this sub-clause.
To remove doubt it is hereby expressly agreed that the above provisions of this sub-clause do not constitute an undertaking by the Authority in
favour of anyone who is not a party to this development contract and do not give anyone who is not a party to this development contract any
right against the Authority.
At the end of one year from the end of the development period the developer shall sign a long lease contract for the plot and each of the
buildings or apartments in respect of which the developer did not refer any person to the Authority for signature of a long lease contract as
aforesaid, and/or a long lease contract for the plot and each of the buildings or apartments which, in the light of the restriction and/or non-
fulfillment of the abovementioned prior and fundamental conditions, will not be let by long lease by the Authority to the party who was referred
to it by the developer.
In this sub-clause-
"contractor" –
a developer who has received the Authority's express agreement, in the preamble to this development contract, that the buildings or
apartments to be built by it under this development contract will be let by long lease to others in accordance with the developer's
instruction to the Authority, and on condition that the said developer is a contractor registered under the Registration of Contractors
for Construction Engineering Works Law, 5729-1969 or a housing company recognized as such by the Ministry of Construction and
Housing.
(1) The developer declares that it has read the long lease contract, has understood its contents and agrees to all its terms and to the terms of sub-
clause (d) or (e) above, as the case may be.
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Israel Lands Authority
4.
The consideration
(a)
In return for the Authority's undertakings the developer shall pay the Authority the payments specified in the preamble, in the definition of "the
consideration".
(b)
(c)
The developer shall also pay the Authority the payments specified in the preamble, in the definition of "the additional obligations" if such
payments were specified.
On the date of signature of the contract the developer shall furnish the Authority with confirmation of deposit of the amounts stated in sub-
clauses (a) and (b) above in favour of the Authority.
5.
The developer's undertakings in connection with planning, construction and registration
The developer hereby undertakes:
(a)
(b)
(c)
(d)
(e)
(f)
To prepare and submit to the Authority for its approval the building plans for the buildings which it wishes to construct on the plot, a survey
map of the plot prepared by a chartered surveyor and any other document which is required for the said construction (hereinafter- the plans or
the building plans), not later than the date of submission of the plans specified in the preamble.
To submit to the competent planning authorities only the building plans which were approved by the Authority and to do everything necessary to
obtain a building permit in accordance with the law from the competent planning authorities – all immediately upon receipt of the Authority's
approval of the building plans.
To attend to the implementation of the approved plans and to commence construction of the buildings under the building permit - not later than
the date of commencement of construction specified in the preamble.
Failure to commence construction on the said date shall be deemed to be breach of this sub-clause even if the developer is not permitted to
commence construction lawfully on the said date because of the fact that it is not in possession of a lawful building permit at that date.
To complete casting the foundations of the buildings in accordance with the approved plans - by the date of completion of casting the
foundations specified in the preamble.
To complete construction of the skeleton of the buildings and their roofs, including completion of construction of the internal partitions so as to
enable identification of the internal division of the buildings (hereinafter - completion of the skeleton) - by the date of completion of the skeleton
specified in the preamble.
To complete construction of the buildings so as to enable occupation and/or operation and/or use thereof in accordance with the purpose of the
allocation by the date of termination of the development period.
(g) Within the development period to prepare and complete all the actions required for registration of the plot as a separate registration unit and to
carry out all the necessary actions for that purpose at its expense, including: surveying, preparation of maps, consolidation, partition, repartition,
separation, etc., so that at the end of the development period it will be possible to register the plot at the Land Registry Office as a separate
registration unit.
The Authority may inform the developer, in advance and in writing, that the Authority intends to perform the said actions, or any of them,
instead of the developer, and in that case the Authority may perform all or some of the said actions itself and at the developer's expense, and the
developer undertakes to pay the Authority any expense which the Authority incurs in order to perform the said actions, in accordance with an
account which shall be submitted to it, within 30 days from the date of submission of the account.
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Israel Lands Authority
(h) Within the development period to prepare and complete all the actions required for registration of the buildings as a condominium (or
condominiums) under the Land Law, 5729-1969, and to carry out all the necessary actions for that purpose at its expense, including preparation
of plans, registration orders, rules, etc., - if the Authority requires the developer to register the buildings as a condominium as aforesaid.
(i)
(j)
(k)
The Authority may inform the developer, in advance and in writing, that the Authority intends to perform the said actions, or any of them,
instead of the developer, and in that case the Authority may perform all or some of the said actions itself and at the developer's expense, and the
developer undertakes to pay the Authority any expense which the Authority incurs in order to perform the said actions, in accordance with an
account which shall be submitted to it, within 30 days from the date of submission of the account.
That if it is recognized by the Authority as a contractor, as defined in sub-clause 3(e) of this contract, it shall be responsible for all the legal
actions required and involved in dealing with those for whom it built buildings or apartments on the plot (hereinafter: "purchasers of the units")
until registration of their rights at the Land Registry Office, including transfer of rights, registration of attachments, giving undertakings to
register mortgages, registration of mortgages in favour of the purchasers of the units, examination of tax certificates and registration of the rights
of the purchasers of the units at the Land Registry Office.
To appear at the Authority's offices and/or anywhere else, as required, on a date to be arranged by it with the Authority in advance, which shall
not be later than the end of the development period, and to sign any document, deed, certificate, etc., as required for the registration of the long
lease for the plot and the buildings which have been established on it and/or any unit in a condominium which has been registered as stated
above, as the case may be. If such a date is not arranged by the developer, the developer undertakes to appear on any date which is fixed and of
which it is notified by the Authority.
To cancel any long lease, encumbrance or note registered at the Land Registry Office, if registered, in cases where this agreement is signed as a
result of a rezoning and/or change of use transaction and the developer is also the registered long-term lessee, and to perform all the actions
required for registration of the long lease as stated in sub-clause (j) above.
The aforesaid cancellation shall take place within the development period and performance thereof shall be a condition for signature of a long
lease agreement with the developer or with the party who is referred to the Authority by it, as stated in clause 3 above.
The Authority may inform the developer, in advance and in writing, that the Authority intends to perform the said actions, or any of them,
instead of the developer, and in that case the Authority may perform all or some of the said actions itself and at the developer's expense, and the
developer undertakes to pay the Authority any expense which the Authority incurs in order to perform the said actions, in accordance with an
account which shall be submitted to it, within 30 days from the date of submission of the account.
(l)
If the developer breaches any of the undertakings stated in sub-clauses (g)-(k) above, without derogating from the provisions of this contract in
connection with breach of the abovementioned undertakings, they shall continue to apply and shall bind the developer even after the end of the
development period, and the Authority shall be entitled to the remedies and relief under any law on account of breach thereof, even after the end
of the development period.
6.
Payment of taxes and other compulsory payments
The developer undertakes to pay, on time, all the governmental, municipal and other taxes, rates, compulsory payments of all kinds and all the
development taxes and development fees of any kind which apply by law to land and/or to owners and/or to occupiers of land, and which shall apply to
the plot and/or in connection therewith, for the entire development period.
The developer undertakes to pay value-added tax in accordance with the law on each of the payments to be borne by the developer under this contract,
at the value-added tax rate on the date of payment thereof.
The developer undertakes to refund to the Authority, on demand,
any payment as stated above, if paid by the Authority, within 30 days from the date of the demand.
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Israel Lands Authority
7.
8.
9.
10.
Payment of development expenses
The developer undertakes to bear all the development expenses, both those which apply to the plot or on account of it or on account of the use thereof
at the date of signature of this contract or prior thereto or after the date of signature of this contract and those which have been paid by the Authority
before the date of signature of this contract. The developer undertakes to pay the development expenses at the demand of the Authority and/or the party
authorized by it to demand payment thereof and/or at the demand of the party who incurred the development expenses.
The developer undertakes to refund to the Authority, on demand,
any payment paid by the Authority for the development expenses, within 30 days from the date of the Authority's demand.
In this clause "development expenses" – expenses and/or levies and/or fees of any kind for development of infrastructure systems and/or super-
infrastructure and/or any other infrastructure which are conditions for the development of the plot or for construction thereon, including creation of
ways of access to the plot, drainage, paving roads and pavements, lighting, water, sewage, etc.
Non-conformity and eviction of occupiers
(a)
The developer hereby declares that it has seen the plot, has examined its physical condition and legal position, and has found them suitable for
all its requirements for the purpose of performance of the contract.
(b) Without prejudice to the generality of the aforesaid, if there are occupiers on the plot:
(1)
(2)
(3)
The Authority shall not have a duty to evict the occupiers and/or shall not be liable for the eviction expenses in any way.
The presence of occupiers on the plot, as aforesaid, shall not serve as grounds and/or justification for non-fulfillment of any provision of
the contract by the developer in general, and compliance with the timetable under this contract in particular.
The developer shall be entitled, not later than three months after the date of signature of this contract, to notify the Authority that on
account of the presence of occupiers on the plot it wishes to cancel the contract. In that case, and if the fact of the presence of such
occupiers is confirmed by the Authority, the Authority will be prepared to agree to cancellation of the contract without agreed damages
and the provisions of clause 13 below shall apply to the cancellation, mutatis mutandis.
Liability during the development period
The developer undertakes, during the entire development period, to keep the plot in proper condition and to take care of it as an owner would take care
of his property, to fulfill the provisions of any law, to be solely and fully liable to the Authority and to any third party for all the acts and/or omissions
of the developer on the plot and/or for any other act and/or omission in connection with the contract and to pay any fine and/or compensation and/or
payment and/or other expense of any kind which shall be imposed on and/or shall apply on account of the aforesaid acts and/or omissions of the
developer, and/or as a result of them.
If the Authority bears any payment on account of such act and/or omission, and/or as a result of them, the developer shall compensate the Authority
and/or shall indemnify it for any such payment within 14 days from the date on which it is called upon to do so.
Interest and linkage on arrears in payment
(a)
Any payment which the developer owes the Authority under this contract and which is not paid by it on time shall be paid by the developer to
the Authority with the addition of interest and/or linkage which shall be calculated until the date of actual payment and shall be at the rates
customary at the Authority at the date of actual payment for arrears in payment, without prejudice to the Authority's other rights under the
contract or under any law.
(b)
Any payment which is made by the developer shall be credited in the following order: collection costs, interest, linkage differentials and finally
the capital.
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Israel Lands Authority
11.
Transfer and encumbrance of the rights
(a)
The authorization given to the developer under the contract is personal. Transfer of all or some of the rights under the contract in any manner,
whether directly or indirectly, and/or letting the plot and/or delivery of possession or use of all or part thereof to others shall be subject to the
Authority's approval and shall be carried out in accordance with its rules as they are at that time.
(b) Without prejudice to the provisions of sub-clause (a) above and in addition to the aforesaid, if the developer is an "association", every act in the
association, during the entire development period, shall be subject to the Authority's approval and shall be carried out in accordance with its
rules as they are at that time. An association which holds a right in the developer association also requires the Authority's approval as aforesaid
and this shall be done in accordance with the Authority's rules as they are at that time.
In this sub-clause:
"association" –
As defined in the Land Betterment Tax Law, 5723-1963 (hereinafter - Betterment Tax Law), as it shall be from time to time and
including an unregistered partnership
"right in an
association" –
As defined in the Betterment Tax Law, as it shall be from time to time
"holder", "holding" -
In accordance with the definition of "holding" in the Securities Law, 5728-1968, as it shall be from time to time, and the terms in the
definition of "holding" in the abovementioned law shall be interpreted as defined from time to time in the said law
"act in an association"
-
As defined in the Betterment Tax Law, and including any change in a developer which is a registered or unregistered partnership, or
change in a developer which is an association whose capital is not in shares, which occurs on account of a person joining or
withdrawing from it, and including any change in the pro rata shares of a partner in the capital of such partnership or association
(c) Without prejudice to the provisions of sub-clauses (a) and (b) above and in addition thereto, the developer is prohibited from pledging and/or
encumbering its rights under the contract and the plot in any way unless it has obtained the Authority's advance written agreement thereto.
In addition, the developer undertakes not to register a caution under the Land Law, 5729-1969 at the Land Registry Office with regard to its
rights under the contract unless it has obtained the Authority's advance written agreement thereto. In any case the Authority shall not agree to the
registration of such a caution as long as the plot has not yet been registered as a separate registration unit.
(d)
If the developer breaches any of the provisions of this clause, this shall be deemed to be fundamental breach of the contract by it, and the
Authority may cancel it at any time on account of this breach.
12.
Breach and cancellation of the contract
(a)
It has hereby been agreed between the parties that the dates stated in the contract and the terms stated in clauses 4, 5 and 11 of the contract are
essential and fundamental terms of the contract, breach of which, or breach of any of which, shall be deemed to be fundamental breach of the
contract.
(b) Without derogating from the provisions of sub-clause (a) above, it is hereby agreed that if any of the breaches specified below occurs the
Authority shall be entitled to cancel the contract immediately upon the breach and to send the developer notice of cancellation thereof by
registered letter (hereinafter – the notice of cancellation):
(1)
(2)
(3)
(4)
If the developer changes or causes a change in the purpose of the allocation or the zoning or makes any use of the plot which is not in
accordance with them.
If the developer breaches another term of the contract and the breach cannot be remedied and/or if the breach can be remedied, and the
developer has not remedied or removed it within 3 months from the date upon which it was called upon in writing to do so by the
Authority
If any of the prior and fundamental conditions in the preamble to this contract have been contravened
If the plot has been handed over to the developer at the recommendation of the Ministry of Construction and Housing and the developer
has not commenced construction on the date fixed in the contract between it and the Ministry of Construction and Housing and the said
Ministry has informed the Authority of this in a letter.
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Israel Lands Authority
(c) Without derogating from all the aforesaid, if the developer or someone for whom the developer is acting is a foreign citizen, this shall be deemed
to be fundamental breach of the contract by the developer, and the Authority shall be entitled to cancel the contract on account of this breach.
In this sub-clause "foreign citizen" – someone who is not one of the following:
(1) An Israeli citizen
(2) An immigrant under the Law of Return, 5710-1950, who has not made a declaration under Section 2 of the Citizenship Law, 5712-1952
(3) A person entitled to an immigrant's visa or immigrant's certificate under the Law of Return, 5710-1950, who instead of it has received a visa
and temporary residence permit as a potential immigrant under the Entry to Israel Law, 5712-1952
(4) A corporation which is under the control of an individual who is one of those enumerated in paragraphs (1) to (3) above, or of more than
one such individual.
In this paragraph, "control" means one of the following:
(a)
(b)
(c)
Holding – directly or indirectly, by one person or corporation or by more than one person or corporation, of 50% or more of the par
value of the issued share capital of the corporation;
Holding – directly or indirectly, by one person or corporation or by more than one person or corporation, of half or more of the
voting power in the corporation;
The right to appoint, directly or indirectly, half or more of the directors of the corporation, whether the abovementioned right is in the
hands of one person or corporation or in the hands of more than one person or corporation
This sub-clause shall not apply to a developer who has received advance written approval for this purpose from the chairman of the
Israel Lands Council.
(d) Without derogating from the aforesaid, it is hereby agreed that if the Authority decides not to cancel the contract, although it was entitled to do
so, the Authority may demand and receive land value differences or fair usage value or agreed damages, whichever of the three is the highest,
from the developer for the period from the date of approval of the transaction until the date of the Authority's decision not to cancel the contract
and/or to grant an extension for performance thereof (hereinafter – "the decision date").
In this clause:
"land value differences": the difference between the full payment which the developer would have been obliged to pay for the plot if it had been
allocated on the decision date, according to the usual terms at the Authority at that date, and the payments which have been made to the
Authority by the developer for the plot, linked to the consumer price index from the date of payment thereof until the decision date
"fair usage value": usage value for the period from the beginning of the development period until the decision date at an annual rate of 6% of the
value of the plot on the decision date, as determined by the Government Appraiser.
"agreed damages": damages agreed and assessed in advance at the rate of 15% of the value of the plot on the decision date
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Israel Lands Authority
13.
The parties' obligations on cancellation of the contract
(a)
On cancellation of the contract as stated in clause 12 above the developer shall be obliged:
(1) To vacate the plot immediately
(2) To return it to the Authority immediately, vacant of any object or person and free of any encumbrance or third party right
(3) To demolish the buildings, fences, plantations and any other fixtures which have been established on the plot by the developer (hereinafter –
the fixtures) and to remove the rubble and restore the plot to the condition in which it was before the establishment of the fixtures, if
required to do so by the Authority
If the developer does not do what is required of it under this sub-clause, the Authority shall be entitled – but not obliged – to perform all the
said actions itself at the developer's expense and to deduct all the expenses which it incurs in connection with its actions from the amounts
paid by the developer to the Authority under the contract, and in any case even if the Authority does not perform any of the said actions the
developer shall not be entitled to any compensation and/or consideration for its investments and/or expenses in connection with the fixtures.
(4) To pay the Authority all the following amounts:
(a) Fair usage value for the period from the date of commencement of the development period until the return of the plot, at an annual rate
of 6% of the value of the plot on the cancellation date, as determined by the Government Appraiser.
(b) All the taxes and compulsory payments which are specified in clause 6 above and which apply in the period mentioned in paragraph (a)
above
(c) The abovementioned clearance expenses
(d) Agreed damages – at the rate of 15% of the basic value of the plot, plus linkage differentials between the base index and the last
consumer price index known on the date of payment
(b)
(c)
It is hereby agreed that if the developer is not required to demolish the fixtures or some of them- as stated in sub-clause (a)(3) above – and the
plot is returned to the Authority together with the fixtures or some of them, the developer shall be entitled to receive the value of the fixtures
from the Authority, as determined by the Government Appraiser at the date of cancellation of the contract.
On receiving the plot back as stated above, the Authority shall refund the developer any amount paid by it to the Authority under this contract,
and any amount which is due to the developer under the provisions of sub-clause (b) above.
The aforesaid amounts shall be refunded by the Authority after deduction of all the amounts specified in paragraph (a)(4) above.
All the aforesaid shall not derogate from the Authority's rights and from any relief to which it is entitled under this contract and by virtue of any
law.
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Israel Lands Authority
(d)
Notwithstanding the provisions of sub-clauses (b) and (c) above, in the case of cancellation of the contract under clause 12(c) above, and on
receiving the plot back as stated in sub-clause (a) above the following provisions shall apply:
The Authority shall declare forfeited all the amounts paid by the developer as defined in clause 13(a)(4) above, and the provisions of sub-clause
(b) above shall not apply to it – all as agreed damages in this case.
Such a developer shall be entitled – on the precondition that it has fulfilled all the provisions of paragraphs (1)–(3) of sub-clause (a) above – to
approach the committee which shall be appointed in this regard by the Israel Lands Council and that committee shall be permitted, if it is
convinced that the developer acted in good faith, to reduce the amounts of the forfeiture to the amount of the agreed damages under sub-clause
(a)(4) above only and/or to determine which amounts shall be refunded to that developer under sub-clause (b) above. The committee's decision
shall be final.
The provisions of this sub-clause shall apply even if other provisions in this regard are enacted in any law.
(e)
(f)
Apart from the amount due to the developer under sub-clause (c) or (d), as the case may be, the developer or anyone acting on its behalf shall
not make any further claim, monetary or otherwise, against the Authority or anyone else, including a claim for its expenses, losses or
investments in connection with this contract.
On cancellation of the contract as stated in clause 12 above the Authority shall be entitled to take sole possession of the plot and to clear it of
any object, building and person found there.
14.
Changes in boundaries and in the area of the plot
(a)
The developer declares that it is aware that the area and boundaries of the plot are not final and that there may be changes in them.
(b)
(c)
It is expressly agreed between the parties that if the area and/or boundaries of the plot change as a result of changes in plan in accordance with
the Planning and Building Law, 5725-1965, settlement of lands, preparation of a survey map for registration purposes and so forth, the
developer undertakes to regard the plot in its new area and/or boundaries as the plot which is the subject of this contract for all purposes, and
apart from what is stated in sub-clause (c) below the developer undertakes not to make any claims or demands against the Authority on account
of such change and all that arises from it.
If as a result of change in the boundaries of the plot and/or in its area the basic value of the plot changes, the amounts stated in clause 4 above
shall be amended pro rata to the change in the basic value of the plot, and the difference shall be paid to the party entitled to it immediately upon
demand, plus interest and/or linkage from the date of approval of the transaction until the date of actual payment, as is usual at the Authority on
the date of payment.
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Israel Lands Authority
15.
Natural resources, antiquities, substances and trees
(a)
(1) The developer hereby declares that it is aware that all natural resources, such as oil, gas, water springs, coal and metal quarries, marble and
stone quarries, sand and kurkar and other quarries of all kinds and antiquities, substances and trees situated on the land of the plot are not
included in the allocation under this contract and that the Authority's terms under this contract do not apply to them. The developer shall
enable the Authority to remove or otherwise exploit the abovementioned natural resources, antiquities, substances and trees in accordance
with the applicable laws and on the basis of this contract.
(2) The developer shall not make excavations on the plot beyond the extent necessary for carrying out the purpose of this contract.
(3) The developer shall not sell substances which it has removed from the plot, as they are the Authority's property, unless it has received the
Authority's advance written consent to this. In addition, the developer shall not remove the trees located on the plot unless it has received
the advance written consent of the competent authority and of the Authority and they may make the granting of their consent conditional
upon payment for the trees.
If the developer contravenes this prohibition, the Authority may demand damages from it. The amount of the damages shall be determined
in accordance with the price of the substances sold or the value of the trees removed which is customary at the Authority at the time of
contravention of the prohibition and in accordance with the amount of the substances or the trees determined by the Authority. The
developer undertakes to pay the damages, as determined by the Authority as aforesaid, within 14 days from the date of sending the demand
for payment.
16.
17.
(b)
The developer undertakes to perform all the actions required under any law in connection with dealing with antiquities, and at its expense to
bear any cost involved in this, including the cost of supervision, archaeological survey, test excavations and rescue excavations, preservation and
moving of antiquities, all as required by the Antiquities Authority.
Right of entry
The authorization given to the developer under the contract does not give it the right to sole possession of the plot and the developer declares that it is
aware that the Authority or its representatives may enter the plot at any time for any purpose. Without derogating from the aforesaid, the Authority,
itself or through others, may convey water, drainage, sewage and gas pipes through the plot, may set up electricity or telephone poles, draw lines for
electricity, telephone and/or other purposes, all in accordance with the plans which shall be approved by the competent authorities, and the developer
shall enable the Authority or others acting on its behalf to enter the plot and carry out the works required for this and all the repairs in connection
therewith which are required from time to time. The Authority undertakes to compensate the developer for any damage which is caused to the
developer by performance of the abovementioned works.
Tenants' Protection Law
The Tenants' Protection Law (Consolidated Version), 5732-1972 and any other law replacing it or in addition to it shall not apply to this contract.
Without derogating from the aforesaid, it is hereby declared that the developer has not paid key money in any form to the Authority for this contract
and that the payments under this contract, and the developer's investments in the plot, if any, shall not be deemed to be payment of key money, and also
on account of this the Tenants' Protection Law (Consolidated Version), 5732-1972 and any other law replacing it or in addition to it shall not apply to
this contract.
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Israel Lands Authority
18.
19.
20.
21.
Preservation of the Authority's rights
(a)
If the Authority does not use any of the rights given to it under the contract, this shall not be deemed to be waiver of that right.
(b)
Changes, amendments, additions, deletions, waivers or extensions of the terms of this contract (hereinafter – changes) shall not bind the parties
unless made in writing and signed by both parties. Changes and deletions in the body of the contract and in the body of any of the documents
which shall be attached to it shall not bind the parties unless both parties have signed with their full signature alongside them.
In this paragraph –
"signature" – with regard to the Authority and with regard to a developer which is a corporation, includes stamp
(c)
Acceptance of any payment by the Authority does not in itself constitute recognition of any rights of the developer and does not grant it any
right which was not granted to it under the contract.
Stamping
The developer shall bear the costs of stamping this contract, if applicable, and 5 copies thereof.
Notices
Notices under this contract shall be sent by registered post.
Any notice which is sent by one party to the other by registered post at the addresses stated in the preamble to the contract shall be deemed to have
been delivered to the addressee five days after it was sent.
Validity of the contract
This contract shall not be valid until it is signed by both parties. After its signature by both parties the contract shall be valid from the date of approval
of the transaction.
In this paragraph -
"signature" –
By initials in the margin of the last line of the preamble and full signature at the end of the contract, and with regard to a developer
which is a corporation, including stamp, and with regard to the Authority – including one stamp stamped on the pages of the contract
together
22. Headings
The headings of the clauses of the contract are for convenience only and shall not be used in interpreting it.
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Israel Lands Authority
In witness whereof the parties have signed:
The Developer:
1. Guy Avidan
Identity number 57478273
/s/ Guy Avidan
Signature:
(signed with company
stamp of Kornit Digital Ltd)
2. Name Ilan Givon
Identity number 055880769
/s/ Ilan Givon
Signature:
The Authority:
1. Name: Mitra Yaakov
Title: Deputy Senior Department Manager –Transactions
Position: Business Division
Israel Lands Authority
/s/ Mitra Yaakov
Signature:
Stamp: Mitra Yaakov
Deputy Senior Department
Manager –Transactions
Business Division
Israel Lands Authority
2. Name: Yair Pines
Title: Deputy Director-General
Position: Business Division Manager
Signature:
Stamp: Yair Pines
Deputy Director-General
Business Division Manager
/s/ Yair Pines
Signature:
Stamp: Avihai Yefet
Deputy Accountant
Israel Lands Authority
/s/ Avihai Yefet
Certifier:
I, the undersigned, certify that I identified the signatories in the "developer" column by identity cards which they exhibited to me and they signed this contract
in my presence.
Name ________________ Description of position ___________ Certifier's signature _____________
When the developer is a corporation/company/non-profit organization, the following must be completed and signature obtained:
I, Adv. Nitzan Deutsch, the advocate of the company Kornit Digital Ltd, Private Company 513195420, hereby certify that on 14/11/18 there appeared before
me Messrs:
1. Guy Avidan I.D. 57478273
2. Ilan Givon I.D. 55880769
3. __________________ I.D. ____________
who are authorized to sign and give undertakings on behalf of the abovementioned company, and after I identified them by the identity cards which they
exhibited to me they signed this contract in my presence.
/s/ Nitsan Deutsch
(Advocate's signature and stamp)
Page 15 of 15
(Plan)
15:01:46 07/11/2018
Israel Lands Authority
Israel Lands Authority
File A10733433
Jerusalem Region Mapping and Surveying Section
Town:
Blocks:
Kiryat Gat
3027
Parcels:
Plot:
See details in table
153
Transaction area: 10.984 dunams
Israel Lands Authority
Jerusalem Business Region
The plan may be attached to the contract
15/01/2018
Date
(signed)
Einat Salmon
Jerusalem Business Region Surveyor
Israel Lands Authority
Plot
153
Block
3027
Part of parcel
14,23
Area in dunams
10.984
Subject
Kornit Digital
Not
File
A10733433
257/02/6
for registration purposes
This plan was prepared in accordance with an order from the municipal department.
Purpose of the plan – allocation of a plot
Notes:
1. The plan is based on registered block map 3027
The plan is based on Town Plan No. 257/02/6
The plan is based on topographic map _____
by the surveyor Leonid Czerniak– MEGA Surveys Ltd
on 24/08/2017
2. The plan was prepared by Avishai Avdan on 15/01/2018
Checked by Einat Salmon on 15/01/2018
Work No. 2630/167
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, Ronen Samuel, 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) 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;
(b) 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;
(c) 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
(d) 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) 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
(b) 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 26, 2019
By: /s/ Ronen Samuel
Ronen Samuel
Chief Executive Officer
(Principal Executive Officer)
Exhibit 12.2
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
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:
(a) 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;
(b) 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;
(c) 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
(d) 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) 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
(b) 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 26, 2019
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, 2018 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), we, Ronen Samuel, 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 26, 2019
By: /s/ Ronen Samuel
Ronen Samuel
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Guy Avidan
Guy Avidan
Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-203970, 333-214015, 333-217039 and 333-223794),
Registration Statement (Form F-3 No. 333-215404) and in the related prospectus of our report dated March 26, 2019, 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, 2018.
Tel Aviv, Israel
March 26, 2019
/s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Exhibit 15.1