Nova Measuring Instruments Ltd.
Annual Report 2020

Plain-text annual report

NOVA LTD. FORM 20-F (Annual and Transition Report (foreign private issuer)) Filed 03/01/21 for the Period Ending 12/31/20 Telephone CIK 972-73-229-5600 0001109345 Symbol NVMI SIC Code Industry Sector Fiscal Year 3827 - Optical Instruments and Lenses Semiconductors Technology 12/31 http://www.edgar-online.com © Copyright 2022, EDGAR Online, a division of Donnelley Financial Solutions. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, a division of Donnelley Financial Solutions, Terms of Use. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 20-F☐REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 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 000-30668NOVA MEASURING INSTRUMENTS LTD.(Exact name of Registrant as specified in its charter)Nova Measuring Instruments Ltd.Israel(Translation of Registrant’s name into English)(Jurisdiction of incorporation or organization)5 David Fikes St., P.O. Box 266 Rehovot 7610201, Israel(Address of principal executive offices)Dror David, +972-73-2295833, +972-8-9407776, P.O.B 266, Rehovot 7610201, Israel(Name, Telephone, E-mail and/or Facsimile number and Address of the Registrant’s Contact Person)Securities registered or to be registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredOrdinary Shares, nominal value NIS 0.01 per shareNVMIThe Nasdaq Global Select MarketSecurities registered or to be registered pursuant to Section 12(g) of the Act:NoneSecurities 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:28,176,862 ordinary shares, NIS 0.01 nominal (par) value per share, as of December 31, 2020.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 theSecurities 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 duringthe 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 forthe past 90 days.Yes ☒  No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).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. Seedefinition of “accelerated filer and large 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 touse the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of theSecurities Act. ☐Indicate by check mark whether the registrant has filed a report on the attestation to its management’s assessment of the effectiveness of its internal control overfinancial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued itsaudit report.Yes ☒  No ☐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 Financing Reporting Standards as issued by the International Accounting Standards Board ☐Other ☐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 CONTENTSPagePART I1Item 1. Identity of Directors, Senior Management and Advisors1Item 2. Offer Statistics and Expected Timetable1Item 3. Key Information.1Item 4. Information on the Company29Item 4A. Unresolved Staff Comments.42Item 5. Operating and Financial Review and Prospects.42Item 6. Directors, Senior Management and Employees.58Item 7. Major Shareholder and Related Party Transactions.74Item 8. Financial Information.77Item 9. The Offer and Listing.78Item 10. Additional Information.78Item 11. Quantitative and Qualitative Disclosures About Market Risk.96Item 12. Description of Securities Other than Equity Securities.97PART II98Item 13. Defaults, Dividend Arrearages and Delinquencies.98Item 14. Material Modification to the Rights of Security Holders and Use of Proceeds.98Item 15. Controls and Procedures.98Item 16A. Audit Committee Financial Expert.99Item 16B. Code of Ethics.99Item 16C. Principal Accountant Fees and Services.99Item 16D. Exemptions from the Listing Standards for Audit Committees.100Item 16E. Purchases of Equity Securities by the Issuer and Affiliates Purchasers.100Item 16F. Change In Registrant’s Certifying Accountant.100Item 16G. Corporate Governance.101Item 16H. Mine Safety Disclosure.101PART III101Item 17. Financial Statements.101Item 18. Financial Statements.101Item 19. Exhibits.101Exhibit Index100SIGNATURES101- i -IntroductionIn this Annual Report, the “Company”, “Nova”, “we” or “our” refers to Nova Measuring Instruments Ltd. and its consolidated subsidiaries, when thecontext requires.Our Functional CurrencyUnless otherwise indicated, all amounts herein are expressed in United States dollars (“U.S. dollars”, “dollars”, “USD”, “US$” or “$”).The currency of the primary economic environment in which we operate is the U.S. dollar, since substantially all our revenues to date have beendenominated in U.S. dollars and over 50% of our expenses are in U.S. dollars or in New Israeli Shekels linked to the dollar. Transactions and balancesdenominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been re-measured into dollars as required by theprinciples in ASC 830 Foreign Currency Matters. All exchange gains and losses from such re-measurement are included in the net financial income when theyarise.Cautionary Statement Regarding Forward-Looking StatementsCertain information contained herein, which does not relate to historical financial information, may be deemed to constitute forward-lookingstatements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “will likely result”, “are expected to”, “willcontinue”, “is anticipated”, “estimate”, “project”, “believe”, “plan”, or similar expressions identify “forward looking statements”. Such statements, includingwithout limitation, statements relating to our anticipated sales, revenues and expenses, our expectations with respect to our business and operations and ourability to gain market share are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and thosepresently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of thedate made. We cannot guarantee future results, levels of activity, performance or achievements. We also undertake no obligation to release publicly anyrevisions to these forward–looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.Among the factors that could cause our actual results in the future to differ materially from any opinions or statements expressed with respect to future periodsare competitive industry conditions and the ability to forecast the needs of the semiconductor industry with respect to the very cyclical nature of the industryand the very fast pace of technology evolutions and factors related to the conditions of the global markets and the global economy. Various other factors thatcould cause our actual results to differ materially are set forth in “Item 3D. Risk Factors” in this annual report on Form 20-F and elsewhere herein.- ii -PART IItem 1. Identity of Directors, Senior Management and AdvisorsNot applicable.Item 2. Offer Statistics and Expected TimetableNot applicable.Item 3. Key Information3A.Selected Financial DataThe following selected consolidated financial data as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018have been derived from our audited consolidated financial statements included elsewhere in this annual report. These financial statements have been prepared inaccordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and audited by our independent registered publicaccounting firm. The consolidated selected financial data as of December 31, 2017, and December 31, 2016 and for the years ended December 31, 2017 andDecember 31, 2016 have been derived from other consolidated financial statements not included in this Form 20-F that were also prepared in accordance withU.S. GAAP and audited by our independent registered public accounting firm. The selected consolidated financial data set forth below should be read inconjunction with and are qualified by reference to “Item 5. Operating and Financial Review and Prospects” and the consolidated financial statements and notesthereto and other financial information included elsewhere in this annual report on Form 20-F.Summary of Consolidated Financial DataYear ended December 31,20162017201820192020(in thousands, except per share data)Consolidated Statement of Operations Data:Revenues$163,903$221,992$251,134$224,909$269,396Cost of revenues88,62390,805105,900103,089116,473Gross profit75,280131,187145,234121,820152,923Operating expenses:Research and development expenses, net34,99838,95645,45144,50853,015Sales and marketing expenses20,73623,75127,99328,21329,321General and administrative expenses6,8358,1008,73510,06612,514Amortization of intangible assets2,5452,5612,6132,6252,503Total operating expenses65,11473,36884,79285,41297,353Operating income10,16657,81960,44236,40855,570Financing income, net1,2162,2762,9843,078926Income before taxes on income11,38260,09563,42639,48656,496Income taxes expenses1,73813,6369,0514,3158,589Net income for the year$9,644$46,459$54,375$35,17147,907 Earnings per share:Basic$0.35$1.68$1.94$1.26$1.71Diluted$0.35$1.63$1.89$1.23$1.65Shares used in calculation of net earnings per share (inthousands):Basic27,17527,69628,02227,89528,097Diluted27,50328,52428,76528,57428,950December 31,20162017201820192020(in thousands)Consolidated Balance Sheet Data:Working capital$128,872$179,782$233,499$256,699$497,767Total assets218,593283,285333,430400,443655,786Capital stock (including Ordinary shares and additionalpaid-in capital)117,102122,500122,386120,811129,348Shareholders’ equity174,717226,736280,740314,539371,53813B. Capitalization and IndebtednessNot applicable.3C. Reasons for the Offer and Use of ProceedsNot applicable.3D. Risk FactorsSummary Risk FactorsOur business is subject to a number of risks of which you should be aware of before making an investment decision. These risks are discussed more fully in the“Risk Factors” section of this annual report. These risks include, but are not limited to, the following:Economic and External Risks•Our business could be disrupted by catastrophic events, such as the outbreak of COVID-19.•Increased information technology security threats, more sophisticated computer crime, and changes in privacy laws could disrupt our business.•We are dependent on international sales, which expose us to foreign political and economic risks that could impede our plans for expansion and growth.•Changes in U.S. trade policies and other factors beyond our control may adversely impact our business, financial condition and results of operations.Risks related to technology and Intellectual Property•Because of the technical nature of our business, our intellectual property is extremely important to our business, and our inability to protect our intellectualproperty or our involvement in related litigation could harm our competitive position.•We may incorporate open source technology in some of our software and products, which may expose us to liability and have a material impact on ourproduct development and sales.2Risks related to our industry•We operate in an extremely competitive market, and if we fail to compete effectively or to respond to the rapid technological changes, our revenues andmarket share will decline.•The ongoing consolidation in our industry may harm us if our competitors are able to offer a broader range of products and greater customer support thanwe can offer.•The markets we target are cyclical and it is difficult to predict the length and strength of any downturn or expansion period.Operational risks•Because most of our current sales are dependent on few specific product lines, factors that adversely affect the pricing and demand for these product linescould reduce our sales.•We depend on a small number of large customers, and the loss of one or more of them could significantly lower our revenues.•There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs or to ensure thesale of related inventory.•New product lines that we may introduce in the future may contain defects, which will require us to allocate time and financial resources to correct.•Our dependence on a single manufacturing facility per product line magnifies the risk of an interruption in our production capabilities.•We may not be successful in our efforts to complete and integrate current and/or future acquisitions, which could disrupt our current business activities andadversely affect our results of operations or future growth.•We depend on a limited number of suppliers, and in some cases a sole supplier. Any disruption or termination of these supply channels may adverselyaffect our ability to manufacture our products and to deliver them to our customers.•Our operations may be disrupted by loss of key personnel.•Our lengthy sales cycle increases our exposure to customer delays in orders, which may result in obsolete inventory and volatile quarterly revenues.Risks Related to Our Incorporation and Location in Israel•Political, economic, and military instability in Israel may impede our ability to operate and harm our financial results.•Our operations may be disrupted by the obligation of key personnel to perform military service.Risks Related to Our Indebtedness and Capital Structure•Our convertible senior notes may impact our financial results, result in the dilution of existing shareholders, create downward pressure on the price of ourordinary shares, and restrict our ability to take advantage of future opportunities. We may not have the ability to raise the funds necessary to settleconversions, and the accounting method for the Convertible Notes could adversely affect our reported financial condition and resultsFinancial, legal, regulatory and taxation risks•Our profit margin may be seriously harmed by currency fluctuations.•We participate in government programs under which we receive research and development grants. Some of these programs impose restrictions on ourability to use the technologies developed under these programs. The reduction or termination of these programs would increase our costs.3•The application of tax laws is subject to interpretation and if tax authorities challenge our methodologies or our analysis of our tax rates it could result in anincrease to our worldwide effective tax rate and cause us to change the way we operate our business.•We experience quarterly fluctuations in our operating results, which may adversely impact our share price.•Some of our contracts and arrangements potentially subject us to the risk of significant or non-limited liability.•The market price of our ordinary shares may be affected by a limited trading volume and may fluctuate significantly.•A bankruptcy of one of the banks in which or through which we hold or invest our cash reserves, might prevent us to access that cash for an uncertainperiod of time.•We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.•Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.•We may be classified as a “passive foreign investment company” for U.S. income tax purposes, which could have significant and adverse tax consequencesto U.S. shareholders.•If a United States person is treated as owning at least 10% of our shares, such holder may be subject to adverse U.S. federal income tax consequences.4Economic and External RisksOur business could be disrupted by catastrophic events, such as the recent outbreak of COVID-19.The COVID-19 pandemic has caused substantial global disruptions, including in the jurisdictions where we develop our products and conduct businessand may cause additional disruptions in the future, which are impossible to predict. Local, regional and national authorities in numerous jurisdictions, includingthe United States and Israel, have implemented a variety of measures designed to slow the spread of the virus, including social distancing guidelines,quarantines, banning of non-essential travel and requiring the cessation of non-essential activities on the premises of businesses.Some of the risks associated with the pandemic or a worsening of the pandemic in the future include:•cancellation or reduction of routes available from common carriers, which may cause delays in our ability to deliver or service our products orreceive components from suppliers necessary to manufacture or service our products;•travel bans or the requirement to quarantine for a lengthy period after entering a jurisdiction, which may delay our ability to install the productswe sell or service those products following installation;•governmental orders or employee exposure requiring us, our customers or our suppliers to discontinue manufacturing products at our respectivefacilities for a period of time;•reduced demand for our products, push-out of deliveries or cancellation of orders by our customers caused by a global recession or slower demandresulting from the pandemic and the measures implemented by authorities;•increased costs or inability to acquire components necessary for the manufacture of our products due to lower availability;•Financial difficulties of one of our suppliers, which will affect our ability to manufacture our products on time for delivery to our customers;•absence of liquidity at customers and suppliers caused by disruptions from the pandemic, which may hamper the ability of customers to pay forthe products they purchase on time or at all, or hamper the ability of our suppliers to continue to supply components to us in a timely manner or atall; and•loss of efficiencies due to remote working requirements for our employees.Furthermore, to the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heighteningmany of the other factors described in this section and in the “Risk Factors’” section in this Form 20-F.The occurrence of unforeseen or catastrophic events such as terrorist attacks, extreme terrestrial or solar weather events or other natural disasters,emergence of a pandemic, or other widespread health emergencies (or concerns over the possibility of such an emergency), could create economic and financialdisruptions, and could lead to operational difficulties that could impair our ability to manage our business.Increased information technology security threats, more sophisticated computer crime, and changes in privacy laws could disrupt our business.Our global operations are linked by information systems, including telecommunications, the internet, our corporate intranet, network communications,email and various computer hardware and software applications. In light of information technology security threats, we have implemented network securitymeasures and engaged the services of a cybersecurity consulting firm to conduct an information security risk assessment review which was reviewed anddiscussed by our audit committee and board of directors. In the current environment, there are numerous and evolving risks to cybersecurity and privacy,including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profilesecurity breaches at other companies and in government agencies have increased in recent years, and security industry experts and government officials havewarned about the risks of hackers and cyberattacks targeting businesses such as ours. Computer hackers and others routinely attempt to breach the security oftechnology products, services and systems, and to fraudulently induce employees, customers, or others to disclose information or unwittingly provide access tosystems or data.5Although we have invested in measures to reduce these risks, we can provide no assurance that our current IT systems are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. The cost and operational consequences of implementing, maintainingand enhancing further data or system protection measures could increase significantly to overcome increasingly intense, complex, and sophisticated globalcyber threats. Despite our best efforts, we are not fully insulated from data breaches and system disruptions and, accordingly, we have experienced and expectto continue to experience actual or attempted cyberattacks of our IT networks. Although none of these actual or attempted cyberattacks has had a materialadverse effect on our operations or financial condition thus far, we cannot guarantee that any such incidents will not have a material adverse effect on ouroperations or financial condition in the future. For instance, during the first half of 2020, our G&A expenses included a $3 million expense, related to anincident, in which a financial institution used by the Company for certain financial transactions, wired out Company funds without Company's authorization.These wire transfers were executed based on instructions given by a fraudster, directly to the financial institution. Although almost all of such funds have beenretrieved in full, there is no assurance that such events, at a larger scale, will not happen in the future. Any material breaches of cybersecurity or media reportsof perceived security vulnerabilities to our systems or those of the Company’s third parties, even if no breach has been attempted or occurred, could cause us toexperience reputational harm, loss of customers and revenue, regulatory actions and scrutiny, sanctions or other statutory penalties, litigation, liability forfailure to safeguard our customers’ information, or financial losses that are either not insured against or not fully covered through any insurance maintained byus. Any of the foregoing may have a material adverse effect on our business, operating results and financial condition.As such, our tools and servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computersystems and tools located at our facility or at customer sites, or could be subject to system failures or malfunctions for other reasons. Increased informationtechnology security threats and more sophisticated computer crime pose a risk to the security of our systems and networks and the confidentiality, availabilityand integrity of our data or customer data. Cybersecurity attacks could also include attacks targeting the security, integrity and/or reliability of the hardware andsoftware installed in our products. System failures or malfunctioning could disrupt our operations and our ability to timely and accurately process and reportkey components of our financial results.Further, the regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeablefuture. In the European Union, the General Data Protection Regulation (GDPR) imposes more stringent data protection requirements and provides for greaterpenalties for noncompliance. The California Consumer Privacy Act (CCPA), enacted in 2018 and entered into effect in January 2020, creates new consumerrights relating to the access to, deletion of, and sharing of personal information that is collected by businesses. Any inability to adequately address privacy andsecurity concerns or comply with applicable privacy and data security laws, rules and regulations could have an adverse effect on our business prospects, resultsof operations and/or financial position.6We are dependent on international sales, which expose us to foreign political and economic risks that could impede our plans for expansion andgrowth.Our principal customers are located in Taiwan, South Korea, China, Japan and the United States, and we produce our products in Israel and the UnitedStates. International operations expose us to a variety of risks that could seriously impact our financial condition and impede our growth including:•instability in political or economic conditions, including but not limited to inflation, recession, foreign currency exchange restrictions anddevaluations, restrictive governmental controls on the movement and repatriation of earnings and capital, and actual or anticipated military orpolitical conflicts, particularly in emerging markets;•intergovernmental conflicts or actions, including but not limited to armed conflict, trade wars and acts of terrorism or war; and•interruptions to the Company’s business with its largest customers, distributors and suppliers resulting from but not limited to, strikes, andfinancial instabilities. For instance, trade restrictions, changes in tariffs and import and export license requirements could adversely affect ourability to sell our products in the countries adopting or changing those restrictions, tariffs or requirements. This could reduce our sales by amaterial amount.Specifically, starting 2018 and to date, the U.S. Department of Commerce has taken actions to restrict exports to several Chinese based semiconductormanufacturers, such as Fujian Jinhua Integrated Circuit Company, Ltd. (“JHICC”) and Semiconductor Manufacturing International Corporation (“SMIC”).These customers have acquired several of our metrology solutions in the past. Due to the abovementioned export restrictions, our U.S. subsidiary is currentlyrestricted from shipping tools or parts or provide any form of service to JHICC and SMIC, until it is cleared to resume by the appropriate authorities.In addition, in 2020 the US Department of State introduced restrictions on exporting to customers who are suppliers to Huawei, which is a Chinesebased electronics supplier. Since the introduction of these restrictions, our US subsidiary has put in place a procedure to ensure compliance with theserestrictions.In some cases, the abovementioned export restrictions might also be applicable to the products which we export from other countries.Additionally, the uncertainty of the economic, financial, regulatory, trade, tax and legal implications of the withdrawal of the U.K. from the E.U.(“Brexit”) and other significant political developments could also have a materially adverse effect on our business. All of these risks could result in increasedcosts or decreased revenues, either of which could have a materially adverse effect on our profitability.Changes in U.S. trade policies and other factors beyond our control may adversely impact our business, financial condition and results of operations.The international environment in which we operate is affected from inter-country trade agreements and tariffs. As a result of recent revisions in theU.S. administrative policy there are, and may be additional, changes to existing trade agreements, greater restrictions on free trade and significant increases intariffs on goods imported into the United States, particularly those manufactured in China, Mexico and Canada. Future actions of the U.S. administration andthat of foreign governments, including China, with respect to tariffs or international trade agreements and policies remains currently unclear.7The escalation of a trade war, tariffs, retaliatory tariffs or other trade restrictions on products and materials either exported by us to China or rawmaterials imported by us from China may significantly impede our ability to provide our solutions and service our customers in China or other effectedlocations. Such developments may result in a decrease in demand for our products and technologies as well as delays in payments from our customers.Furthermore, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and economic conditionsor in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries, where our customers are located,could adversely affect our business, financial condition, operating results and cash flows.We may be affected by instability in the global economy and by financial turmoil.Instability in the global markets and in the geopolitical environment in many parts of the world as well as other disruptions may continue to putpressure on global economic conditions. In the event global economic and market conditions, or economic conditions in key markets, remain uncertain ordeteriorate further, we may experience material impacts on our business, operating results, and financial condition.Because we derive a significant portion of our revenues from sales in Asia, our sales could be hurt by instability of Asian economies.A number of Asian countries have experienced political and economic instability. For instance, Taiwan and China have had a number of disputes, ashave North and South Korea, and Japan has for a number of years experienced significant economic instability. Additionally, the Asia-Pacific region issusceptible to the occurrence of natural disasters, such as earthquakes, cyclones, tsunamis and flooding. We have subsidiaries in Taiwan, Japan and South Koreaand we have significant customers in Taiwan and South Korea as well as in China. An outbreak of hostilities or other political upheaval, economic downturns orthe occurrence of a natural disaster in these or other Asian countries would likely harm the operations of our customers in these countries, causing our sales tosuffer.8Risks related to technology and Intellectual PropertyBecause of the technical nature of our business, our intellectual property is extremely important to our business, and our inability to protect ourintellectual property could harm our competitive position.Our continued success depends upon our ability to protect our core technology and intellectual property. We therefore have an extensive programdevoted resources to seeking patent protection for our inventions and discoveries that we believe will provide us with competitive advantages. Our patents andapplications principally cover various aspects of optical measurement systems and methods, integrated process control implementation concepts, and optical,opto-mechanical and mechanical design. In addition, our patents and applications cover various aspects of X-ray based measurement systems and methods,including process control implementation concepts, X-ray energy sources, electron optics and detection, vacuum systems and equipment integration.We cannot assure that:•pending patent applications will be approved; or•any patents will be broad enough to protect our technology, will provide us with competitive advantages or will not be challenged or invalidatedby third parties. We also cannot assure that others will not independently develop similar products, duplicate our products or, if patents are issuedto us, design around these patents. Furthermore, because patents may afford less protection under foreign law than is available under U.S. law, wecannot assure that any foreign patents issued to us will adequately protect our proprietary rights.In addition, some of the patents which relate to our main-stream products have already expired or are expected to be expired in the coming years. Suchexpiration may add significant competition to our tools in this area, which may lead to a decrease in our incomes. In addition, not all of our patents are coveringall territories we operate in, and thus in some territories there is less coverage to some product lines.In addition to patent protection, we also rely upon trade secret protection, employee and third-party nondisclosure agreements and other intellectualproperty protection methods to protect our confidential and proprietary information. Despite these efforts, we cannot be certain that others will not otherwisegain access to our trade secrets or disclose our technology.Additionally, as part of our long-term technological collaboration, we are engaged with joint development activities with some of our strategiccustomers and vendors as well as with research institutes. These activities impose some limitations on the joint intellectual property developed as part of theseprograms.Furthermore, we may be required to institute legal proceedings to protect our intellectual property. If such legal proceedings are resolved adversely tous, our competitive position and/or results of operations could be harmed. For additional information on our intellectual property, see “Item 4B. BusinessOverview — Intellectual Property” in this annual report on Form 20-F.9There has been significant litigation involving intellectual property rights in the semiconductor and related industries, and similar litigation involvingNova could force us to divert resources to defend against such litigation or deter our customers from purchasing our systems.We have been, and may in the future be, notified of allegations that we may be infringing intellectual property rights possessed by others. In addition,we may be required to commence legal proceedings against third parties, which may be infringing our intellectual property, in order to defend our intellectualproperty. In the future, protracted litigation and expense may be incurred to defend ourselves against alleged infringement of third-party rights or to defend ourintellectual property against infringement by third parties. Adverse determinations in that type of litigation could:•result in our loss of proprietary rights;•subject us to significant liabilities, including triple damages in some instances;•require us to seek licenses from third parties, which licenses may not be available on reasonable terms or at all; or•prevent us from selling our products.Any litigation of this type, even if we are ultimately successful, could result in substantial cost and diversion of time and effort by our management,which by itself could have a negative impact on our profit margin, available funds, competitive position and ability to develop and market new and existingproducts. For additional information on our intellectual property, see “Item 4B. Business Overview — Intellectual Property” in this annual report on Form 20-F.We may incorporate open source technology in some of our software and products, which may expose us to liability and have a material impact on ourproduct development and sales.Some of our software and products utilize open source technologies. These technologies may be subject to certain open source licenses, including butnot limited to the General Public License, which, when used or integrated in particular manners, impose certain requirements on the subsequent use of suchtechnologies, and pose a potential risk to proprietary nature of products. In the event that we have or will in the future, use or integrate software that is subjectto such open source licenses into or in connection with our products in such ways that will trigger certain requirements of these open source licenses, we may(i) be required to include certain notices and abide by other requirements in the absence of which we may be found in breach of the copyrights owned by thecreators of such open source technologies; and/or (ii) be required to disclose our own source code or parts thereof to the public, which could enable ourcompetitors to eliminate some or any technological advantage that our products may have over theirs. Any such requirement to disclose our source code orother confidential information related to our products, and the failure to abide by license requirement resulting in copyright infringement, could materiallyadversely affect our competitive position and impact our business results of operations and financial condition.10Risks related to our industryWe operate in an extremely competitive market, and if we fail to compete effectively, our revenues and market share will decline.Although the market for process control systems used in semiconductor manufacturing is currently concentrated and characterized by relatively fewparticipants, the semiconductor capital equipment industry is intensely competitive. We compete mainly with Onto Innovation Inc. (formerly Nanometrics Inc.and Rudolph Technologies Inc., who have merged during the second half of 2019), and KLA Corp., which manufacture and sell integrated and/or stand-aloneprocess control systems. In addition, we compete with process equipment manufacturers (“PEMs”), such as ASML Holdings N.V., and Applied Materials Inc.,which develop (or might as well acquire companies which develop) in-situ sensors and metrology products. Established companies, both domestic and foreign,compete with our product lines, and new competitors enter our market from time to time. Some of our competitors have greater financial, engineering,manufacturing and marketing resources than we do. If a particular customer selects a competitor’s capital equipment, we expect to experience difficulty inselling our solution to that customer for a significant period of time. A substantial investment is required by the customers to evaluate, test, select and integratecapital equipment into a production line. As a result, once a manufacturer has selected a particular vendor’s capital equipment, we believe that the manufacturergenerally relies upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipmentrequirements with the same vendor. Accordingly, unless our systems offer performance or cost advantages that outweigh a customer’s expense of switching toour systems, it will be difficult for us to achieve significant sales from that customer once it has selected another vendor’s system for an application. We believethat our ability to compete successfully depends on a number of factors both within and outside of our control, including:•the contribution and value our solutions bring to our customers;•our product innovation, quality and performance;•our global technical service and support;•the return on investment (ROI) of our equipment and its cost of ownership;•the breadth of our product line;•our success in developing and marketing new products; and•the extendibility of our products.If we fail to compete in a timely and cost-effective manner against current or future competitors, our revenues and market share will decline.If we do not respond effectively and on a timely basis to rapid technological changes, our ability to attract and retain customers could be diminished,which would have an adverse effect on our sales and ability to remain competitive.The semiconductor manufacturing industry is characterized by rapid technological changes, new product introductions and enhancements and evolvingindustry standards. Our ability to remain competitive and generate revenue will depend in part upon our ability to develop new and enhanced systems atcompetitive prices in a timely and cost-effective manner and to accurately predict technology transitions. Because new product development commitments mustbe made well in advance of sales, new product decisions must anticipate the future demand for products. If we fail to correctly anticipate future demand forproducts, our sales and competitive position will deteriorate. In addition, the development of new measurement technologies, new product introductions orenhancements by our competitors could cause a decline in our sales or loss of market acceptance of our existing products.The ongoing consolidation in our industry may harm us if our competitors are able to offer a broader range of products and greater customer supportthan we can offer.We believe that the semiconductor capital equipment market has undergone consolidation over the last few years. For example, Lam ResearchCorporation acquired Novellus Systems Inc. in 2016 and Coventor in 2017; Thermo Fisher Scientific Inc. acquired FEI Company, Inc. in 2016; ASMLHoldings N.V. acquired Hermes Microvision Inc. in 2016; KLA Corporation acquired Orbotech Ltd. in 2019; and Nanometrics Inc. and Rudolph Technologies,Inc. merged in 2019. We believe that similar acquisitions and business combinations involving our competitors, our customers and the PEMs may occur in thefuture. These acquisitions could adversely impact our competitive position by enabling our competitors and potential competitors to expand their productofferings and customer services, which could provide them an advantage in meeting customers’ needs, particularly with those customers that seek to consolidatetheir capital equipment requirements with a smaller number of vendors. The greater resources, including financial, marketing, intellectual property and supportresources, of competitors involved in these acquisitions could allow them to accelerate the development and commercialization of new competitive productsand the marketing of existing competitive products to their larger installed bases. Accordingly, such business combinations and acquisitions by competitorsand/or customers could jeopardize our competitive position.11The markets we target are cyclical and it is difficult to predict the length and strength of any downturn or expansion period.The semiconductor capital equipment market and industries, which are cyclical, experienced steep downturns and upturns in the last two decades. Inrecent years, we have seen a more stable overall capital investment patterns, yet we cannot predict the length and strength of potential future downturns orexpansions.Operational risksBecause substantially most of our current sales are dependent on few specific product lines, factors that adversely affect the pricing and demand forthese product lines could substantially reduce our sales.We are currently dependent on few process control product lines. We expect revenues from these product lines to continue to account for a substantialportion of our revenues in the coming years. As a result, factors adversely affecting the pricing of, or demand for, these product lines, such as competition andtechnological change, could significantly reduce our sales.We depend on a small number of large customers, and the loss of one or more of them could significantly lower our revenues.Like our peers serving the semiconductor front end market, our customer base is highly concentrated among a limited number of large customers. Weanticipate that our revenues will continue to depend on a limited number of major customers, although the companies considered to be our major customers andthe percentage of our revenue represented by each major customer may vary from period to period. As a result of our customer concentration, our financialperformance may fluctuate significantly from period to period based, among others, on exogenous circumstances related to our clients. For example, it ispossible that any of our major customers could terminate its purchasing relationship with us or significantly reduce or delay the amount of orders for ourproducts, purchase products from our competitors, or develop its own alternative solutions internally. The loss of any one of our major customers wouldadversely affect our revenues. Furthermore, if any of our customers become insolvent or have difficulties meeting their financial obligations to us for anyreason, we may suffer losses. For more information regarding our sales by major customers as percentage of our total sales, see Note 12 to our consolidatedfinancial statements contained elsewhere in this report.12Our inability to significantly reduce spending during a protracted slowdown in the semiconductor industry could reduce our prospects of achievingcontinued profitability.Historically, we have derived all our revenues, and we expect to continue to derive practically all of our revenues, from sales of our products andrelated services to the semiconductor industry. Our business depends in large part upon capital expenditures by semiconductor manufacturers, which in turndepend upon the current and anticipated demand for semiconductors. The semiconductor industry has experienced severe and protracted cyclical downturns andupturns. Cyclical downturns, as those we have experienced in the past, may cause material reductions in the demand for the products and services that we offer,and may result in a decline in our sales. In addition, our ability to significantly reduce expenses during such cyclical downturn may be limited because of:•our continuing need to invest in research and development;•our continuing need to market our new products; and•our extensive ongoing customer service and support requirements worldwide.Furthermore, during 2020, we increased our leased facilities and related investments and our operating expenses. In the event of a global recession orcertain other economic conditions forcing the Company to materially reduce its expenses, portions of such facilities may be rendered obsolete. As a result, wemay have difficulty achieving continued profitability during a protracted slowdown.There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs or toensure the sale of inventory related to these products.We must continue to make significant investments in research and development in order to introduce new products and technologies, or to enhance theperformance, features and functionality of our existing products, to keep pace with the competitive landscape and to satisfy customer demands. Substantialresearch and development costs are typically incurred before we confirm the technical feasibility and commercial viability of a new product, and not alldevelopment activities result in commercially viable products. There can be no assurance that revenues from future products or product enhancements will besufficient to recover the development costs associated with such products or enhancements. In addition, we cannot be sure that these products or enhancementswill receive market acceptance or that we will be able to sell these products at prices that are favorable to us. Our business will be seriously harmed if we areunable to sell our products at favorable prices or if the market in which we operate does not accept our products. In addition, in some cases, we accumulateinventories based on sales forecasts. If such sales forecasts are not materialized, we might need to write-off the related inventory, which will increase our losses.New product lines that we may introduce in the future may contain defects, which will require us to allocate time and financial resources to correct.Our new product lines may contain defects when first introduced. If there are defects, we will need to divert the attention of our personnel from ourongoing product development efforts to address the detection and correction of the defects. We cannot provide assurances that we will not incur any costs orliabilities or experience any lags or delays in the future. Moreover, the occurrence of such defects, whether caused by our products or the products of anothervendor, may result in significant customer relations problems and adversely affect our reputation and may impair the market acceptance of our products.13If any of our systems fail to meet or exceed our internal quality specifications, we cannot ship them until such time as they have met suchspecifications. If we experience significant delays or are unable to ship our products to our customers as a result of our internal processes or for anyother reason, our business and reputation may be adversely affected.Our products are complex and require technical expertise to design and manufacture. Various problems occasionally arise during the manufacturingprocess that may cause delays and/or impair product quality. We actively monitor our manufacturing processes to ensure that our products meet our internalquality specifications. Any significant delays stemming from the failure of our products to meet or exceed our internal quality specifications, or for any otherreasons, would delay our shipments. Shipment delays could be harmful to our business, revenues and reputation in the industry.Our dependence on a single manufacturing facility per product line magnifies the risk of an interruption in our production capabilities.We have one manufacturing facility for our Optical CD product lines, which is located in Weizmann Science Park, Nes Ziona, Israel, and onemanufacturing facility for our XPS product line, which is located in Fremont, CA, US (the "Manufacturing Facilities"). These Manufacturing Facilities includespecial clean room environments and manufacturing jigs, which are customized to our needs. In addition, most of our ongoing inventories, including our mainwarehouse and work in process, are located in these Manufacturing Facilities. Although we adopted measures to protect these manufacturing facilities andinventories, and a disaster recovery plan, any event affecting any of our Manufacturing Facilities, including natural disaster, labor stoppages or armed conflict,may disrupt or indefinitely discontinue our manufacturing capabilities and could significantly impair our ability to fulfill orders and generate revenues, thusnegatively impacting our business.Our lease agreements for our Manufacturing Facilities include provisions that exempt the landlord and others from liability for damages to ourManufacturing Facilities.Pursuant to the lease agreements for our Manufacturing Facilities, the landlord and anyone on its behalf, and additional tenants are exempt from anyliability for direct or consequential damages to our Manufacturing Facilities, except in the event of willful misconduct. While we have obtained insurancepolicies against certain damages, the aforementioned exemption of liability could compromise our ability to recover the full amount of such damages, andconsequently we may incur substantial costs upon the occurrence of such damages.Because shipment dates may be changed and some of our customers may cancel or delay orders with little or no penalty, and since we encounterdifficulties in collecting cancellation fees from our customers, our backlog may not be a reliable indicator of actual sales and financial results.We schedule production of our systems based upon order backlog and customer forecasts. We include in backlog only those orders received from thecustomers in which a delivery date has been specified. In general, our ability to rely on our backlog for future forecasting and planning is limited becauseshipment dates may be changed, some customers may cancel or delay orders with little or no penalty, and our ability to collect cancellation fees from customersis not assured. Thus, our backlog may not be a reliable indicator of actual sales and financial results.14We may not be successful in our efforts to complete and integrate current and/or future acquisitions, which could disrupt our current businessactivities and adversely affect our results of operations or future growth.Any acquisition may involve many risks, including the risks of:•diverting management’s attention and other resources from our ongoing business concerns;•entering markets in which we have no direct prior experience;•improperly evaluating new services, products and markets;•being unable to maintain uniform standards, controls, procedures and policies;•failing to comply with governmental requirements pertaining to acquisitions of local companies or assets by foreign entities;•being unable to integrate new technologies or personnel;•incurring the expenses of any undisclosed or potential liabilities; and•the departure of key management and employees.If we are unable to successfully complete our future acquisitions or to effectively complete the integration of our future acquisitions, our ability togrow our business or to operate our business effectively could be reduced, and our business, financial condition and operating results could suffer. Even if weare successful in completing acquisitions, we cannot assure that we will be able to integrate the operations of the acquired business without encounteringdifficulty regarding different business strategies with respect to marketing and integration of personnel with disparate business backgrounds and corporatecultures. Further, in certain cases, mergers and acquisitions require special approvals, or are subject to scrutiny by the local authorities, and failing to complywith such requirements or to receive such approvals, may prevent or limit our ability to complete the acquisitions as well as expose us to legal proceedings prioror following the consummation of such acquisitions. In some cases, such proceedings, if initiated, may conclude in a requirement to divest portions of theacquired business.We depend on continuous cooperation with Process Equipment Manufacturers (“PEMs”) to enable sales of our integrated metrology systems, and theloss of PEMs as business partners could harm our business.We believe that sales of integrated metrology systems will continue to be an important source of our revenues. Sales of our integrated metrologysystems depend upon the ability of PEMs to sell semiconductor equipment products that are able to integrate with our metrology systems. If our PEMs areunable to sell such products, if they choose to focus their attention on products that do not integrate our systems, or if they choose to develop their ownmetrology solutions, our business could suffer. If we were to lose our PEMs as business partners for any reason, our inability to realize sales from integratedmetrology systems could significantly harm our business. In addition, we may not be able to develop or market new integrated metrology products, which couldslow or prevent our growth.15Some of our commercial agreements with PEMs and customers may include exclusivity provisions and limitations on the use of certain intellectualproperty. Such limitations may prevent us from engaging in certain business relationships with third parties, and may limit our ability to use certainelements of our intellectual property. As a result, our ability to introduce new products in relevant markets might be affected.Some of our commercial agreements with PEMs and customers may include exclusivity provisions, which prevent us from engaging in certainbusiness relationships with third parties. In addition, some of our commercial agreements with PEMs also include limitations on the use of certain jointintellectual property. These exclusivity obligations and limitations are often used as a tool to promote the development and the penetration of innovative newsolutions, and are usually limited in terms of scope and length. When considering whether to enter into any such exclusivity arrangements or accepting suchlimitations, we usually take into consideration the terms of the exclusivity (e.g., length and scope), the expected benefit to the Company, and the risks andlimitations associated with such exclusivity or limiting undertakings. Exclusivity obligations or limitation of use relating to certain parts of our technology andproducts may affect our ability to commercialize our products, engage in potentially beneficial business relationships with third parties (including by means of amerger or acquisition), or introduce new products into relevant markets, which could slow or prevent our growth.We depend on a limited number of suppliers, and in some cases a sole supplier. Any disruption or termination of these supply channels may adverselyaffect our ability to manufacture our products and to deliver them to our customers.We purchase components, subassemblies and services from a limited number of suppliers and occasionally from a single or a sole source. Disruptionor termination of these sources could occur (due to several factors, including, but not limited to, bankruptcy, work stoppages, acts of war, terrorism, fire,earthquake, energy shortages, flooding or other natural disasters), and these disruptions could have at least a temporary adverse effect on our operations.Although we generally maintain an inventory of critical components used in the manufacture and assembly of our systems, such supplies may not be sufficientto avoid potential delays that could have an adverse effect on our business.To date, we have not experienced any material disruption or termination of our supply sources.A prolonged inability on our part to obtain components included in our systems on a cost-effective basis could adversely impact our ability to deliverproducts on a timely basis, which could harm our sales and customer relationships.The disclosure rules regarding the use of conflict minerals may affect our relationships with suppliers and customers.The Securities and Exchange Commission requires certain disclosure by companies that use conflict minerals in their products, with substantial supplychain verification requirements in the event that the materials come from, or could have come from, the Democratic Republic of the Congo or adjoiningcountries. These rules and verification requirements may impose additional costs on us and on our suppliers, and limit the sources or increase the prices ofmaterials used in our products. Among other things, this rule could affect sourcing at competitive prices and availability in sufficient quantities of certainminerals used in the manufacture of components that are incorporated into our products. In addition, the number of suppliers who provide conflict-free mineralsmay be limited, and there may be material costs associated with complying with the disclosure requirements, such as costs related to the process of determiningthe source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of suchverification activities. We may not be able to sufficiently verify the origins of the relevant minerals used in components manufactured by third parties throughthe procedures that we implement, and we may encounter challenges to satisfy those customers who require that all of the components of our products becertified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so. While we have created processes and proceduresdesigned to enable compliance to these rules, if in the future we are unable to certify that our products are conflict free, we may face challenges with ourcustomers, which could place us at a competitive disadvantage and harm our reputation.16We depend on a small number of employees who possess both executive and technical expertise, and the loss of any of these key employees would hurtour ability to implement our strategy and to compete effectively.Because we rely on employees with both executive and advanced technical skills, our success depends significantly upon the continued contributionsof our officers and key personnel. All of our key management and technical personnel have expertise, which is in high demand among our competitors, and theloss of any of these individuals could cause our business to suffer. We do not maintain life insurance policies for our officers and directors.Our lengthy sales cycle increases our exposure to customer delays in orders, which may result in obsolete inventory and volatile quarterly revenues.Sales of our systems depend, in significant part, upon our customers adding new manufacturing capacity or expanding existing manufacturingcapacity, both of which involve a significant capital commitment. We may experience delays in finalizing sales while a customer evaluates and approves aninitial purchase of our systems. Our sales cycle for new customers, products or applications, may take longer than twelve (12) months to complete. During thistime, we may expend substantial funds and management effort, but fail to make any sales. Lengthy sales cycles subject us to a number of significant risks,including inventory obsolescence and fluctuations in operating results, over which we have limited control.Risks Related to Our Incorporation and Location in IsraelPolitical, economic and military instability in Israel may impede our ability to operate and harm our financial results.Our principal executive offices and research and development facilities are located in Israel and therefore may be influenced by regional instability andextreme military tension. Accordingly, political, economic and military conditions in Israel and the surrounding region could directly affect our business. Anyarmed conflicts, political instability, terrorism, cyberattacks or any other hostilities involving Israel or the interruption or curtailment of trade between Israel andits present trading partners could affect adversely our operations. Ongoing and revived hostilities or other Israeli political or economic factors, could prevent ordelay shipments of our products, harm our operations and product development and cause any future sales to decrease. In the event that hostilities disrupt theongoing operation of our facilities or the airports and seaports on which we depend to import and export our supplies and products, our operations may bematerially adverse affected.17On Israel’s domestic front there is currently a level of unprecedented political instability. The Israeli government has been in a transitionary phasesince December of 2018, when the Israeli Parliament, or the Knesset, first resolved to dissolve itself and call for new general elections. In 2019, Israel heldgeneral elections twice – in April and September – and a third general election was held on March 2, 2020. The Knesset, for reasons related to this extendedpolitical transition, has failed to pass a budget for the year 2020, and certain government ministries, which may be critical to the operation of our business, arewithout necessary resources and may not receive sufficient funding moving forward. During December 2020, the government was unable to pass a budget bythe applicable deadline, triggering a snap election expected to take place during March, 2021, lurching the country back into a protracted political crisis. Giventhe likelihood that the current political stalemate might not be resolved during the next calendar year, our ability to conduct our business effectively may beadversely affected.Our operations may be disrupted by the obligation of key personnel to perform military service.Some of our executive officers and employees in Israel are obligated to perform significant periods of military reserve service until the age of 40 forsoldiers and until the age of 45 for officers. This time-period may also be extended by the Military Chief of the General Staff and the approval of the Ministerof Defense or by a directive of the Minister of Defense in the event of a declared national emergency. Our operations could be disrupted by the absence for asignificant period of one or more of our executive officers or key employees due to military service. To date, our operations have not been materially disruptedas a result of these military service obligations. Any disruption in our operations due to such obligations would adversely affect our ability to produce andmarket our existing products and to develop and market future products.Risks Related to Our Indebtedness and Capital StructureOur convertible senior notes (“Convertible Senior Notes”) may impact our financial results, result in the dilution of existing shareholders, createdownward pressure on the price of our ordinary shares, and restrict our ability to take advantage of future opportunities.On October 16, 2020, we closed an offering of $200 million aggregate principal amount of 0% Convertible Senior Notes due 2025 in a private offeringto qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The sale of the Convertible Senior Notes may affect ourearnings per share figures, as accounting procedures may require that we include in our calculation of earnings per share the number of ordinary shares intowhich the Convertible Senior Notes are convertible. The Convertible Senior Notes may be converted, under the conditions and at the premium specified in theConvertible Senior Notes, into cash and our ordinary shares, if any (subject to our right to pay cash in lieu of all or a portion of such shares). If our ordinaryshares are issued to the holders of the Convertible Senior Notes upon conversion, there will be dilution to our shareholders’ equity and the market price of ourordinary shares may decrease due to the additional selling pressure in the market. Any downward pressure on the price of our ordinary shares caused by the saleor potential sale of ordinary shares issuable upon conversion of the Convertible Senior Notes could also encourage short sales by third parties, creatingadditional downward pressure on our share price.18Furthermore, the indenture for the Convertible Senior Notes will prohibit us from engaging in certain mergers or acquisitions unless, among otherthings, the surviving entity assumes our obligations under the Convertible Senior Notes. These and other provisions in the indenture could deter or prevent athird party from acquiring us even when the acquisition may be favorable.We currently anticipate that we will be able to rely on and to implement certain clarifications from the applicable Tax Authorities, with respect to theadministration of our Israeli withholding tax obligations in relation to considerations to be paid to the holders of the Convertible Senior Notes upon their futureconversion and settlement as well as other related tax aspects. Unexpected failure to ultimately obtain such anticipated clarifications from the Israeli TaxAuthorities could potentially result in increased Israeli withholding tax gross-up costs.We may not have the ability to raise the funds necessary to settle conversions of the Convertible Senior Notes, repurchase the Convertible Senior Notesupon a fundamental change or repay the Convertible Senior Notes in cash at their maturity, and our future debt may contain limitations on our abilityto pay cash upon conversion or repurchase of the Convertible Senior Notes.Holders of the Convertible Senior Notes will have the right under the indenture governing the Convertible Senior Notes to require us to repurchase allor a portion of their Convertible Senior Notes upon the occurrence of a fundamental change before the applicable maturity date, at a repurchase price equal to100% of the principal amount of such Convertible Notes to be repurchased, plus accrued and unpaid interest, if any. Moreover, we will be required to repay theConvertible Notes in cash at their maturity, unless earlier converted, repurchased or redeemed. We may not have enough available cash or be able to obtainfinancing at the time we are required to make such repurchases of the Convertible Senior Notes and/or repay the Convertible Senior Notes upon maturity.In addition, we have the right to elect to settle conversions of the Convertible Senior Notes in cash.Our ability to repurchase or to pay cash upon conversion of Convertible Senior Notes may be limited by law, regulatory authority or agreementsgoverning our future indebtedness. Our failure to repurchase the Convertible Senior Notes at a time when the repurchase is required by the indenture or to paycash upon conversion of the Convertible Senior Notes or at maturity as required by the indenture would constitute a default under the indenture. A default underthe indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the payment of the relatedindebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase theConvertible Senior Notes or to pay cash upon conversion of the Convertible Senior Notes or at maturity.The accounting method for the Convertible Notes could adversely affect our reported financial condition and results.Under applicable accounting standards we separately account for debt and equity components of convertible notes that may be settled in cash. Thecarrying amount of the debt component was based on the fair value of a similar hypothetical debt instrument excluding the conversion feature, valued using aneffective borrowing rate which was based on our synthetic credit risk. Issuance costs were allocated to the debt and equity components in proportion to theallocation of proceeds to those components. The difference between the principal amount of the Convertible notes and the amount allocated to the debtcomponent was considered to be debt discount, which is subsequently amortized through non cash interest expenses over the expected life of the ConvertibleNotes.19The amortization of debt discount and issuance costs that we expect to recognize for the Convertible Notes will result in lower reported income orhigher reported loss. The lower reported income or higher reported loss resulting from this accounting treatment could adversely affect our reported or futurefinancial results, the trading price of our ordinary shares and the Convertible Notes. In addition, under certain circumstances, convertible debt instruments (suchas the Convertible Senior Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which isthat the shares issuable upon conversion of such Notes are not included in the calculation of diluted earnings per share except to the extent that the conversionvalue of such Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for asif the number of ordinary shares that would be necessary to settle such excess, if we elected to settle such excess in shares, are included in the denominator forpurposes of calculating diluted earnings per share.In August 2020, the Financial Accounting Standards Board published an Accounting Standards Update (“ASU”) eliminating the separate accountingfor the debt and equity components as described above. The ASU will be effective for public entities for fiscal years beginning after December 15, 2021,including interim periods within those fiscal years, early adoption is permitted but not earlier than fiscal years beginning after December 15, 2020. Wheneffective, the elimination of the separate accounting described above may impact the amortization of debt discount and issuance costs that we expect torecognize for the Convertible Notes for accounting purposes. The ASU described above also eliminates the possibility of treasury stock method for convertibleinstruments such as the Convertible Notes (unless we make the relevant election eliminating the option to settle the principal amount of the relevant instrumentin shares) and instead require application of the “if-converted” method. Under that method, diluted earnings per share would generally be calculated assumingthat all the Convertible Notes were converted solely into ordinary shares at the beginning of the reporting period, unless the result would be anti-dilutive. Theapplication of the if-converted method is expected to reduce our reported diluted earnings per share. Furthermore, if any of the conditions to the convertibilityof the Convertible Notes is satisfied, then we may be required under applicable accounting standards to reclassify the liability carrying value of the ConvertibleNotes, as the case may be, as a current, rather than a long-term, liability. This reclassification could be required even if no noteholders convert their notes andcould materially reduce our reported working capital.Financial, legal, regulatory and taxation risksBecause most of our revenues are generated in U.S. dollars, but a significant portion of our expenses is incurred in currencies other than U.S. dollars,and mainly New Israeli Shekels, our profit margin may be seriously harmed by currency fluctuations.We generate most of our revenues in U.S. dollars, but incur a significant portion of our expenses in currencies other than U.S. dollar, and mainly NewIsraeli Shekel, commonly referred to as NIS.In addition, starting January 1, 2019, in accordance with ASC 842 of lease accounting standard, we are required to present a significant NIS linkedliability related to our operational leases in Israel. As a result, we are exposed to risk of devaluation of the U.S. dollar in relation to the NIS and othercurrencies. In such event, the dollar cost of our operations in countries other than the U.S. will increase and our dollar measured results of operations will beadversely affected. During 2020, the U.S. dollar devaluated against the NIS by 7.0%, after being devaluated by approximately 10.1% in the previous threeyears. We cannot predict the future trends in the rate of devaluation or revaluation of the U.S. dollar against the NIS, and our operations also could be adverselyaffected if we are unable to hedge against currency fluctuations in the future.20We participate in government programs under which we receive research and development grants. Some of these programs impose restrictions on ourability to use the technologies developed under these programs. The reduction or termination of these programs would increase our costs.Until the end of 2016, we received royalty-bearing grants from the Israel Innovation Authority, or IIA (formerly known as the Office of the ChiefScientist of the Ministry of Economy and Industry, or the OCS), for the financing of certain of our research and development programs that meet specifiedcriteria. Starting 2018, we also participate in IIA royalty free grant programs.In addition, through the years, we participated in consortiums which are either solely managed by the IIA, or are joint consortiums of the IIA and theEuropean Research Area. To maintain our eligibility for these programs, we must continue to meet certain conditions.All these programs also restrict our ability to manufacture particular products and transfer particular technology, which were developed as part of theIIA’s programs, outside of Israel. The restrictions associated with these IIA’s programs may require us to obtain approval of the research and developmentcommittee nominated by the IIA for certain actions and transactions and pay additional payments to the IIA. Approval to manufacture products outside of Israelor consent to the transfer of technology, if requested, might not be granted and if granted, may increase our financial liabilities to the IIA. In addition, if we failto comply with certain restrictions associated with formerly received IIA's funding, we may be subject to criminal charges.We are further exposed to risks related to the receipt of funding from other governments or governmental agencies in connection with strategicdevelopment programs, under which we receive funding. Under such strategic development programs, governments and governmental agencies typically havethe right to terminate the program’s funding at any time. In addition, a project may be terminated by a mutual agreement, if the parties determine that theproject's goals or milestones are not being achieved. As a result, there is no assurance that these sources of external funding will continue to be available to us inthe future. Moreover, under the terms of certain governmental funding programs in which we receive funding, the applicable granting agency has the right toaudit the costs that we incur, directly and indirectly, in connection with such programs. Any such audit could result in modifications to, or even termination of,the applicable governmental funding program. Any adverse finding resulting from any such audit could lead to penalties (financial or otherwise), termination offunding programs, suspension of payments or other adverse consequences to our ability to receive governmental funding. In addition, obligations related togrants received from the IIA grants bear an annual interest rate based on the 12-month LIBOR. Currently, there is considerable uncertainty regarding thepublication of LIBOR beyond 2021, and it is not possible to determine precisely whether, or to what extent, the replacement of LIBOR would affect companies'existing or future liabilities to the IIA.21The application of tax laws is subject to interpretation and if tax authorities challenge our methodologies or our analysis of our tax rates it could resultin an increase to our worldwide effective tax rate and cause us to change the way we operate our business.The application of the tax laws of various jurisdictions to our international business activities is subject to interpretation and also depends on ourability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The tax authorities of the jurisdictions inwhich we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, ordetermine that the manner in which we operate our business does not achieve the expected tax consequences, which could result in tax and penalty paymentsand in an increase of our worldwide effective tax rate, and could adversely affect our financial position and results of operations.A certain degree of judgment is required in evaluating our tax positions and determining our provision for income taxes. In the ordinary course ofbusiness, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could beadversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where wehave higher statutory rates, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principlesand interpretations. As we operate in numerous taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflictinginterpretations by tax authorities of these jurisdictions. It is not uncommon for tax authorities in different countries to have conflicting views. In addition, taxlaws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. For example, the work being carriedout by the OECD on base erosion and profit shifting as a response to increasing globalization of trade could result in changes in tax treaties or the introductionof new legislation that could impose an additional tax on businesses. As a result of changes to laws or interpretations, our tax positions could be challenged, andour income tax expenses could increase in the future.For instance, if tax authorities in any of the countries in which we operate were to successfully challenge our transfer prices, they could require us toreallocate our income to reflect transfer pricing adjustments, which could result in an increased tax liability to us. In addition, if the country from which theincome was reallocated did not agree with the reallocation asserted by the first country, we could become subject to tax on the same income in both countries,resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest andpenalties, it could increase our tax liability, which could adversely affect our financial position and results of operations.We are subject to certain limitations related to the repatriation of funds that benefited from the tax exemption under the Approved and BenefitedEnterprises, Preferred Enterprises and New Technological Enterprise Incentives regimes. The distribution or deemed distribution of such funds maybe subject to recapture provisions under which we will be subject to the corporate tax that we were initially exempt from.Until the end of 2015 we were eligible to receive certain tax benefits under Israeli law for capital investments as an Approved and BenefitedEnterprise. In 2016, we made an election to receive tax benefits under Israeli law for capital investments as a “Preferred Enterprise”. Starting 2017, we made anelection to receive Tax benefits under Israeli “Economic Efficiency Law” as a “Preferred Technological Enterprise”. While we believe that we meet thestatutory conditions to entitle us to such benefits there can be no assurance that the tax authorities in Israel will concur to our position in general and for eachspecific year separately. We may be subject to additional taxes resulting from deemed dividend distribution of profits allocated to Approved Enterprise(Alternative Track) benefits, for example in case of a share repurchase or investment in foreign companies. Should it be determined that we have not, or do notmeet such conditions, the benefits received would be cancelled. We would also be required to pay increased taxes or refund any benefits previously received,adjusted to the Israeli consumer price index and interest, or other monetary penalty. For additional information regarding Approved and Benefited Enterprise,Preferred Enterprise and Preferred Technological Enterprise see, “Item 10E. Taxation – Israeli Taxation” in this annual report on Form 20-F.22It should be noted that the Israeli government may reduce or eliminate the above-mentioned benefits in the future. The termination or reduction ofthese grants or tax benefits could harm our financial condition and results of operations, and result in significantly higher fluent tax payment. In addition, if weincrease our activities outside Israel due to, for example, future acquisitions or outsourcing of manufacturing or development activities, these activitiesgenerally will not be eligible for inclusion in Israeli grants or tax benefit programs. Accordingly, our effective corporate tax rate could increase significantly inthe future.We have historically generated losses and may incur future losses.Since the year 2009, we have been able to demonstrate continued profitability, yet since our inception in 1993, we have had several years of losses andwe may incur net losses in future years as well. We plan to increase our aggregate operating expenses in 2021 relative to 2020. However, our ability to generateprofits is dependent mainly on our ability to generate sufficient sales. In the future, our sales may not be sufficient to cover the increase in our expenses and wemay not be able to maintain profitability, mainly during a protracted slowdown.We experience quarterly fluctuations in our operating results, which may adversely impact our share price.Our quarterly operating results within a specific year can fluctuate significantly. A principal reason is that we derive a substantial portion of ourrevenue from the sale of a relatively small number of systems to a relatively small number of customers. As a result, our revenues and results of operations forany given quarter may decrease due to factors relating to the timing of orders, the timing of shipments of systems, and the timing of recognizing these revenues.Furthermore, our quarterly results are affected by the cyclical nature of the semiconductor capital equipment market and industries.We also have a limited ability to predict revenues for future quarterly periods and, as a result, face risks of revenue shortfalls. If the number of systemswe actually ship, and thus the amount of revenues we are able to record in any particular quarter, is below our expectations, the adverse effect may be magnifiedby our inability to adjust spending quickly enough to compensate for the revenue shortfall.23Some of our contracts and arrangements potentially subject us to the risk of significant or non-limited liability.We produce highly complex optical and electronic components and, accordingly, there is a risk that defects may occur in any of our products. Suchdefects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory and lossof potential sales. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused bysuch defects.In our commercial relationship with customers, we attempt to negotiate waivers of consequential and indirect damages arising from damages for lossof use, loss of product, loss of revenue and loss of profit caused by our products. Similarly, with respect to our commercial relationship with subcontractors andsuppliers, we attempt to negotiate arrangements which do not include a limitation of liabilities and limitation of consequential and in direct damages. However,some contracts and arrangements we are bound by expose us to product liability claims resulting in personal injury or death, up to an unlimited amount, and theincurrence of the risk of material penalties for consequential or liquidated damages. Additionally, under such contracts and arrangements, we may be named inproduct liability claims even if there is no evidence that our products caused the damage in question, and such claims could result in significant costs andexpenses relating to attorneys’ fees and damages.In addition, such contracts and arrangements may include non-limited liability provisions for infringement of a third party’s intellectual property rightsin connection with our products.Although we have not incurred in the past any material penalties for consequential or liquidated damages, we may incur such penalties in the future.Such penalties for consequential or liquidated damages may be significant (and so is the legal process conducted in connection with such penalties) and couldnegatively affect our financial condition or results of operations.A large number of our ordinary shares continue to be owned by a relatively small number of shareholders, whose future sales of our shares, ifsubstantial, may depress our share price.If our principal shareholders sell substantial amounts of our ordinary shares, including shares issued upon the exercise of outstanding options orwarrants, the market price of our ordinary shares may fall. For additional information on our major shareholders, see “Item 7A – Major Shareholders” in thisannual report on Form 20-F.Certain shareholders may control the outcome of matters submitted to a vote of our shareholders, including the election of directors.To the best of our knowledge, approximately 35% of our outstanding ordinary shares are cumulatively held by five of our shareholders. As a result,and although we are currently not aware of any voting agreement between such shareholders, if these shareholders voted together or in the same manner, theywould have the ability to control the outcome of corporate actions requiring an ordinary majority vote of shareholders as set in the Company’s Amended andRestated Articles of Association. Even if these shareholders do not vote together, each one of them may have the ability to influence the outcome of corporateactions requiring the vote of shareholders as set in the Company’s Amended and Restated Articles of Association. For additional information on our majorshareholders, see “Item 7A – Major Shareholders” in this annual report on Form 20-F.The market price of our ordinary shares may be affected by a limited trading volume and may fluctuate significantly.In the past, there has been a limited public market for our ordinary shares and there can be no assurance that an active trading market for our ordinaryshares will continue. An absence of an active trading market could adversely affect our shareholders’ ability to sell our ordinary shares in short time periods.Our ordinary shares have experienced, and are likely to experience in the future, significant price and volume fluctuations, which could adversely affect themarket price of our ordinary shares without regard to our operating performance.24In addition, the price of our ordinary shares could also be affected by possible sales of our ordinary shares by investors who view our convertiblesenior notes as a more attractive means of equity participation in our company, and by hedging and arbitrage trading activity that such investors may engage in.We manage our available cash through various bank institutions and invest large portions of our cash reserves in bank deposits. A bankruptcy of oneof the banks in which or through which we hold or invest our cash reserves, might prevent us to access that cash for an uncertain period of time.We manage our available cash through various bank institutions and invest large portions of our cash reserves in bank deposits. As of December 31,2020, substantially all of our cash reserves were invested in bank institutions, of which approximately 30% was invested in one institution. A bankruptcy of oneof the banks in which we hold our cash reserves or through which we invest our cash reserves, might prevent us to access that cash for an uncertain period oftime.We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section404 (Assessment of Internal Control), which started in connection with our Annual Report on Form 20-F for the fiscal year ended December 31, 2007, haveresulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continuedcommitment of resources. Section 404 of the Sarbanes-Oxley Act of 2002 requires (i) management’s annual review and evaluation of our internal control overfinancial reporting and (ii) an attestation report issued by an independent registered public accounting firm on our internal control over financial reporting, inconnection with the filing of our Annual Report on Form 20-F for each fiscal year. We have documented and tested our internal control systems and proceduresin order for us to comply with the requirements of Section 404. While our assessment of our internal control over financial reporting resulted in our conclusionthat as of December 31, 2020, our internal control over financial reporting was effective, we cannot predict the outcome of our testing in future periods. If wefail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internalcontrols over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatoryauthorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price ofour ordinary shares.Provisions of our Amended and Restated Articles of Association and Israeli law may delay, prevent or make difficult an acquisition of Nova, whichcould prevent a change of control and negatively affect the price of our ordinary shares.Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, for special approvals fortransactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore,Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See Exhibit 2.1 to this annual report on form 20-F,“Description of the Securities”. For a more detailed discussion regarding some anti-takeover effects of Israeli law.25These provisions of Israeli law may delay, prevent or make difficult an acquisition of Nova, which could prevent a change of control and thereforedepress the price of our shares.The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities ofshareholders under U.S. law.We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our Amended and RestatedArticles of Association and by the Israeli Companies Law, 1999 (the “Companies Law”). These rights and responsibilities differ in some respects from therights and responsibilities of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law each shareholder of an Israeli company hasto act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing hispower in the company, including, among other things, in voting at the general meeting of shareholders and class meetings, on amendments to a company’sarticles of association, increases in a company’s authorized share capital, mergers, and transactions requiring shareholders’ approval under the Companies Law.In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholdervote or who has the power to appoint or prevent the appointment of a director or officer in the company, or has other powers toward the company has a duty offairness toward the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensiverevision in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.Any shareholder with a cause of action against us as a result of buying, selling or holding our ordinary shares may have difficulty asserting a claimunder U.S. securities laws or enforcing a U.S. judgment against us or our officers, directors or Israeli auditors.We are organized under the laws of the State of Israel, and we maintain most of our operations in Israel. Most of our officers and directors as well asour Israeli auditors reside outside of the United States and a substantial portion of our assets and the assets of these persons are located outside the UnitedStates. Therefore, if you wish to enforce a judgment obtained in the United States against us, or our officers, directors and auditors, you will probably have tofile a claim in an Israeli court. Additionally, you might not be able to bring civil actions under U.S. securities laws if you file a lawsuit in Israel. We have beenadvised by our Israeli counsel that Israeli courts generally enforce a final executory judgment of a U.S. court for liquidated amounts in civil matters after ahearing in Israel. If a foreign judgment is enforced by an Israeli court, it will be payable in Israeli currency. However, payment in the local currency of thecountry where the foreign judgment was given will be acceptable, subject to applicable foreign currency restrictions.Our shares are listed for trade on more than one stock exchange, and this may result in price variations.Our ordinary shares are listed for trading on the Nasdaq Global Select Market and on the Tel Aviv Stock Exchange Ltd., or TASE. This may result inprice variations. Our ordinary shares are traded on these markets in different currencies, U.S. dollars on the Nasdaq Global Select Market and New IsraeliShekels on the TASE. These markets have different opening times and close on different days. Different trading times and differences in exchange rates, amongother factors, may result in our shares being traded at a price differential on these two markets. In addition, market influences in one market may influence theprice at which our shares are traded on the other.26Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of oursecurities.In recent years, certain Israeli issuers listed on United States exchanges have been faced with governance-related demands from activist shareholders,as well as unsolicited tender offers and proxy contests. Although as a foreign private issuer we are not subject to U.S. proxy rules, responding to these types ofactions by activist shareholders could be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees.Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual meetingwould require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our board ofdirectors. The perceived uncertainties due to these potential actions of activist shareholders also could affect the market price and volatility of our securities.We may be classified as a “passive foreign investment company” for U.S. income tax purposes, which could have significant and adverse taxconsequences to U.S. shareholders.Generally, if for any taxable year 75% or more of our gross income consists of specified types of passive income, or, on average, at least 50% of ourassets are held for the production of, or produce, passive income, we may be characterized as a passive foreign investment company (a “PFIC”) for U.S. federalincome tax purposes. Classification of Nova as a PFIC could result in adverse U.S. tax consequences to our U.S. shareholders, such as ineligibility for anypreferential tax rates on capital gains or on dividends, interest charges on certain taxes treated as deferred, and additional reporting requirements under U.S.federal income tax laws and regulations. If we are a PFIC, it may be possible for U.S. holders of our ordinary shares to mitigate certain of these consequencesby making an election to treat us as a “qualified electing fund” under Section 1295 of the Internal Revenue Code of 1986, as amended (the “Code”) or a “mark-to-market election” under Section 1296 of the Code. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. taxconsequences of investing in our ordinary shares.We believe that for our 2020 taxable year we were not a PFIC. Nonetheless, because the determination of whether we are, or will be, a PFIC for ataxable year depends on the application of complex U.S. federal income tax rules, which are subject to various interpretations, there is a risk that we were aPFIC in 2020. Absent one of the elections referenced above, if we are a PFIC for any taxable year during which a U.S. holder holds our ordinary shares, wegenerally will continue to be treated as a PFIC with respect to such U.S. holder in all succeeding years regardless of whether we cease to meet the PFIC tests inone or more subsequent years. Currently we expect that we will not be a PFIC in 2021 or subsequent years. However, PFIC status is determined based on ourassets and income over the course of each taxable year, and is dependent on a number of factors, including the value of our assets, the trading price of ourordinary shares and the amount and type of our gross income. Therefore, there can be no assurances that we will not become a PFIC for the 2021 taxable year,or any future year, or that the Internal Revenue Service will not challenge any determination made by us concerning our PFIC status. For a discussion on howwe might be characterized as a PFIC and related tax consequences, please see the section of this annual report entitled “Taxation - U.S. Taxation – PassiveForeign Investment Companies.” Investors should consult their own tax advisors regarding all aspects of the application of the PFIC rules to our ordinaryshares.27If a United States person is treated as owning at least 10% of our shares, such holder may be subject to adverse U.S. federal income tax consequences.If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our shares, suchperson may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group. Because our group includes one ormore U.S. subsidiaries, certain of our non-U.S. subsidiaries will be treated as controlled foreign corporations (regardless of whether we are or are not treated asa controlled foreign corporation). A United States shareholder of a controlled foreign corporation may be required to annually report and include in its U.S.taxable income its pro rata share of the controlled foreign corporation’s “Subpart F income”, “global intangible low-taxed income” and investments in U.S.property, whether or not such controlled foreign corporation makes any distributions. An individual that is a United States shareholder with respect to acontrolled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholderthat is a U.S. corporation. A failure to comply with these reporting obligations may subject you to significant monetary penalties and may prevent the statute oflimitations with respect to your U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that wewill assist investors in determining whether any of our current or future non-U.S. subsidiaries are treated as a controlled foreign corporation or whether suchinvestor is treated as a United States shareholder with respect to any of such controlled foreign corporations or furnish to any United States shareholdersinformation that may be necessary to comply with the aforementioned reporting and tax paying obligations. The Internal Revenue Service provided limitedguidance on situations in which U.S. shareholders may rely on publicly available information to comply with their reporting and tax paying obligations withrespect to foreign-controlled CFCs. A United States investor should consult their own advisors regarding the potential application of these rules to itsinvestment in the shares.The Tax Cuts and Jobs Act of 2017 could adversely affect our business and financial condition.On December 22, 2017, President Trump signed into law new legislation, known as the Tax Cuts and Job Act of 2017 (the “US Tax Act”), thatsignificantly revises the Code. The US Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate taxrate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted taxable income (except forcertain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating losscarrybacks, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings(subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, andmodifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in thetesting of certain drugs for rare diseases or conditions). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the US Tax Act isuncertain, and our business and financial condition could be adversely affected. In addition, it is unknown if and to what extent various states will conform tothe US Tax Act. The impact of the US Tax Act on holders of our ordinary shares is likewise uncertain and could be adverse. We urge our shareholders to consultwith their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our ordinary shares.28Item 4. Information on the Company4.A History and Development of the CompanyNova Measuring Instruments Ltd. was incorporated in May 1993 under the laws of the State of Israel. We commenced operations in October 1993 todesign, develop and produce integrated process control systems for use in the manufacture of semiconductors, also known as integrated circuits or chips.In April 2000, we conducted an initial public offering and our shares were listed for trading on the Nasdaq stock exchange.In June 2002, we listed our shares on the TASE, pursuant to legislation which enables Israeli companies whose shares are traded on certain stockexchanges outside of Israel to be registered on the TASE, while reporting, in substance, in accordance with the provision of the relevant foreign securities lawapplicable to the Company.Until 2008, most of our products were sold to process equipment manufacturers such as Applied Materials, Inc. and Ebara Corp., which later sold theseproducts to semiconductor manufacturers. Since then, we have changed our business model, selling substantially all of our products directly to semiconductormanufacturers. Through this process, which has also enabled us to introduce to these customers additional products and features, we have improved ourproducts gross margins and net profitability.In April 2015, we acquired ReVera Inc., a privately held company headquartered in Santa Clara, California, which develops, manufactures and sellsstand-alone metrology tools for measurements of thin-films and composition applications in the semiconductor industry, and on December 31, 2017, we mergedReVera into its parent company, Nova Measuring Instruments, Inc.We currently have five direct fully owned subsidiaries in the U.S., Japan, Taiwan, Korea and Germany.Our headquarter office is located in Israel at 5 David Fikes St., 10th Floor, Rehovot.4.A.8.The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that fileelectronically with the SEC (http://www.sec.gov). The information is also available on our website (http://www.novami.com).294.BBusiness OverviewOur CompanyNova is a leading innovator and key provider of metrology solutions for advanced process control used in semiconductor manufacturing. Novadelivers continuous innovation by providing high-performance metrology solutions for effective process control throughout the semiconductor fabricationprocess. We bring pioneering metrology solutions to semiconductors process control, by industrializing lab and research-grade technologies and developingemerging metrology solutions. Nova’s product portfolio, deployed at the world’s largest integrated-circuit manufacturers, combines high-precision hardwareand cutting-edge software, and provides its customers with deep insight into the development and production of the most advanced semiconductor devices.Nova’s capability to deliver innovative X-ray and Optical solutions enables its customers to improve performance, enhance product yields and accelerate timeto market.Nova’s market offering is driven by product divisions: The Dimensional Metrology Division (DMD) which is responsible for optical technology-basedmetrology solutions (integrated and standalone), and the Materials Metrology Division (MMD) which is responsible for x-ray-based solutions. The corporateunits, such as marketing, next generation technology, human resources, finance and global business group, support both divisions. This structure allows thecompany to focus management attention on each product line separately, as well as to facilitate the integration of additional businesses or technologies in thefuture.Our MarketSemiconductor Industry and the Metrology MarketThe semiconductor manufacturing process starts with a flat silicon disc known as a silicon wafer upon which integrated circuits are constructed. Toconstruct the integrated circuits, a series of layers of thin films that act as conductors, semiconductors or insulators are applied. During the manufacturingprocess, these film layers are subjected to processes which remove portions of the film, create circuit patterns and perform other functions. The semiconductormanufacturing process requires numerous precise steps and strict control of equipment performance and process sequences. Tight process control can beachieved through monitoring silicon wafers and measuring relevant parameters before or after each process step, with metrology tools.The demand for our metrology systems is driven by capital equipment spending of the semiconductor manufacturers, which is in turn driven by theworldwide demand for semiconductor components embedded in technology devices. Industry data indicates worldwide demand for semiconductors willcontinue to grow, driven by the growing adoption of 5G and advanced network infrastructure, artificial intelligence (“AI”) and internet of things (“IoT”)applications, as well as network and data centers thriving through the work-from-home, learn-from-home, buy from home and gaming trends.The growing investment in advanced technology nodes introduces growing complexity and new challenges into the semiconductor manufacturingprocess, as manufacturers are continuously pushed to improve performance and cost in order to gain competitive advantage. In a climate of constant growth,suppliers and manufacturers are asked to constantly come up with new products with greater functionality, better performance at lower prices. As a result, manynew complex materials, advanced structures and processes are being introduced into the semiconductor manufacturing ecosystem. Environment of growingcomplexity in chip design and manufacturing set favorable business conditions for process control demand.30The Semiconductor Manufacturing ProcessSemiconductors devices typically consist of transistors, memory cells or other components connected by an intricate system of circuitry on siliconwafers. Integrated circuit manufacturing involves many individual steps, some of which are repeated several times, through which numerous copies of anintegrated circuit are formed on a single silicon wafer. Because semiconductor specifications are extremely tight, and integrated circuits are becoming morecomplex, the process steps are constantly monitored, and critical parameters are measured at each step using metrology equipment. Key process steps, such asDeposition, Photolithography, Etch and Chemical-Mechanical Planarization, rely on metrology systems to monitor film thickness, uniformity, and criticaldimensions and material characteristics, to ensure the correct result has been achieved.The measurements taken by metrology systems during the manufacturing process help ensure process uniformity and help semiconductormanufacturers avoid costly rework and misprocessing, therefore increasing efficiency, yield and time to market.The Need for Effective Process Control and Metrology ToolsSeveral technical and operational trends within the semiconductor manufacturing industry are strengthening the need for more effective processcontrol and metrology solutions. These trends include•Smaller IC Devices. The development of advanced smaller features means a larger numbers of integrated circuits per wafer. As feature geometriesdecrease, the manufacturing process tolerances decreases as well, and manufacturing yield becomes increasingly sensitive to processingdeviations and defects. In addition, the increased complexity means higher chance of error during manufacturing, leading to additional inlinemonitoring and metrology steps.•Transition to 3D Device. The transition to ever more complex 3D Integration technology, in order to improve performance, requires complexfabrication and as a result more sophisticated metrology solutions to be capable of measuring critical dimensions and materials properties in these3D structures.•Faster Time to Market. The accelerating rate of obsolescence of technology and the faster ramp to yield required by customers makes earlyachievement of high manufacturing yields a critical component of profitability and metrology has a critical role in achieving these demandingresults.•Materials Engineering. In order to overcome limitations in the continued shrink of transistor dimensions, which is used to improve performance,leading manufacturers are introducing new novel materials to IC production. New materials introduction requires new processing and metrologysolutions in the atom level and thus represent a challenging development for the semiconductor manufacturing industry. It also representing agrowing demand for more tighter materials control and therefore increasing demand for Materials Metrology solutions to control parameters suchas composition, stress, ultra-thickness, crystallization and more.•New Manufacturing Steps. Multiple Lithography technologies including multi-patterning and E-Beam are increasing the number of Etch andCMP process steps and EUV poses unique metrology challenges.31•Foundry Model. The rising investment needed for leading edge semiconductor process development and production, as well as the proliferation ofdifferent types of devices, lead to manufacturing increasingly being outsourced to foundries. A foundry typically runs several different processesand makes numerous different semiconductor product types in one facility. Since Foundries are running multiple products at the same time, theneed for process control and metrology is increasing in order to qualify multiple devices on the same wafer at the same high process quality.•Advanced Memory Technology (SSD). Memory manufacturers are going through technology evolution and build vertical devices to managelayers of NAND Memory. Such a complex device that can hold up to hundreds of thin high aspect ratio vertical layers requires significant changesin the manufacturing process. These changes require also many more steps to control through different Metrology solutions and increase theoverall process control intensity for these High Aspect Ratio evolving structures.In order to address the continuous increasing costs and challenges associated with these trends, semiconductor manufacturers must improvemanufacturing procedures, production yields and time to market. Beyond improving the technology, introducing new process steps and innovative fabricationcapabilities, Semiconductors manufacturers must tighten the control over the process and therefore must increase the Metrology intensity as well as introducenew innovative Metrology solutions. These new solutions will allow manufactures to overcome new challenges in dimensions and materials engineering.The Semiconductor Market – UpdateIC Insights forecasts the world GDP to decline by 4.4% in comparison to 2019, due to COVID-19 impact. They expect the global market to recover in2021, with expected growth of 4.8% (The McCLEAN report 2021, published January 2021).According to Gartner, semiconductor revenues are expected to grow by 11.6% in 2021, compared to growth of 7.3% in 2020. In addition, Gartnerforecasts capital spending and wafer fab equipment to grow in 2021 by 6.3% and 7.8% respectively, following growth of 7.6% in CAPEX and 13.9% in WFEin 2020. (Gartner Forecast Semiconductor Wafer Fab Equipment, Worldwide, 4Q20 Update, published January 2021).According to research reports, future demand drivers for semiconductors include 5G mobile devices, data center and cloud infrastructure, ArtificialIntelligence, Augmented and Virtual Reality, Smart Sensors, internet-of-things and other electronic equipment.Products & TechnologiesOur product portfolio includes a complete set of metrology platforms suited for dimensional, films and material metrology measurements for processcontrol across multiple semiconductor manufacturing process steps including lithography, Etch, CMP and deposition. Our offering is comprised of several keyproduct lines, spanning multiple technologies and addressing key challenges in semiconductors process control from R&D to High-Volume-Manufacturing.32Our strategy to offer holistic and diversified portfolio supports the industry’s frequent transitions, establishes the advantages and unique value we bringto our customers. With the introduction of new technologies and products, we cover a wider variety of applications, which increase our served and availablemarkets and footprint in the semiconductor manufacturing industry.TechnologyProduct LineKey applicationsProduct families•Broadband Spectrophotometry•Scatterometry•Spectral Reflectometry•Imaging and Image ProcessingOptical CD IntegratedMetrologyCritical DimensionsThin filmsNova i5X0 (500, 550, 570)Nova 3090NextNova 2040Nova ASTERAOptical CD Stand-AloneMetrologyNova T-5X0 (500, 550. TLM)Nova T600Nova MMSR, MMSR +•Spectral InterferometryNova PRISM•X-Ray PhotoelectronSpectroscopy•X-Ray FluorescenceMaterialsStand-Alone Metrology(X-Ray)Thin filmCompositionNova VERAFLEX III XFNova VERAFLEX III+Nova VERAFLEX IV•Raman SpectroscopyMaterials Stand-AlongMetrology (Optical)StrainCrystallinityPhases & GrainsDefectivityNova ELIPSON•Computational Modeling forElectromagnetic and OpticalSystemsPhysical modeling(Modeling and SoftwareSolutions)Nova Mars•Machine Learning•Advanced AlgorithmsMathematical modeling(Modeling and Softwaresolutions)Nova FIT•Big Data Analytics•High Power ComputingFleet Management(Modeling and Softwaresolutions)Nova FMNova FM+Nova HPCQED33About the product linesOptical CD Integrated MetrologyNova is the leader in the space of integrated metrology with multiple generations of products. Our integrated metrology platforms enable advancedprocess control (APC) to monitor and control wafer to wafer variations of complex high-end CMP and Etch applications with high productivity and reliabilityrequired for the most advanced logic and memory technology nodes. Integrated metrology systems are directly integrated with manufacturing processequipment and provide semiconductor manufacturers with effective and efficient process control by measuring wafers within the process environment.•Nova i5X0 - the i5X0 family of integrated metrology (IM) platforms is Nova’s state-of-the-art and market leading IM solution targetingmanufacturing of advanced logic and memory device technologies. Nova’s i5X0 platforms offer the highest productivity in the market, supportingfast CMP polishers and allowing within-wafer and within-die variation control. Enriched with Nova’s advanced modeling and algorithmicsolutions, the i5X0 integrated metrology provides enhancements in metrology accuracy, precision and tool matching.•Nova ASTERA™ - the Nova ASTERA™ provides stand-alone level performance in a compact form factor of integrated metrology. Utilizingoblique and normal incidence channel measurements, Nova ASTERA™ provides a high level of accuracy, precision, tool matching andextendibility. Nova ASTERA™ is targeted to support the development of the most advanced device technologies, beyond 3nm Logic nanosheetarchitecture and 256 Layers, multi-deck 3D-NAND nodes.Optical CD Stand-Alone MetrologyNova’s stand-alone metrology platforms are utilized to characterize critical dimensions such as width, shape and profile with high precision andaccuracy and are used in multiple areas of the fabrication process such as photolithography, etch, CMP and deposition steps. Nova’s stand-alone platform istargeted for critical dimensions (CD) and thin films measurements at the most advanced logic and memory technology nodes across all semiconductor leadingcustomers. The expression “stand-alone metrology” generically describes free standing metrology equipment, which is located in line, i.e., next to theprocessing equipment measuring wafer samples in a station of its own. Nova’s stand-alone metrology product line is comprised of several platforms, rangingfrom normal channel only to multiple channels of information in one tool. Nova’s unique channels of information enables high metrology performancecombined with high productivity. When incorporating Nova’s advanced suite of modeling and machine learning solutions, the Optical CD stand-alone platformprovides cutting-edge performance for critical dimensions (CD) and thin films measurements of the most complex layer stacks and 3D structures.•Nova PRISM™ - Nova PRISM™ is Nova’s advanced dimensional standalone metrology platform targeted at the most complex devicemanufacturing technologies across the semiconductor segments. It combines revolutionary Spectral Interferometry (SI) and advanced modelingtechnology with state-of-the-art multi-channel optical techniques that create wide and unique spectral information offering. Nova PRISM™delivers invaluable metrology performance that enables our customers to deliver of the most advanced technologies at the highest yield andquality.34Modeling and Software SolutionsAll of Nova’s hardware products are combined with our suite of advanced algorithms and software modeling solutions. Nova’s software modelingsolutions combine top notch algorithms in the field of Artificial Intelligence and machine learning. Nova’s suite of software modeling products is comprised ofNova MARS® physical and geometrical modeling and Nova FIT™ data driven machine learning modeling solutions. These solutions are supported by NovaHPC®, a computational management layer, which also serves as the foundation for Nova’s Centralized Fleet Management and Control. Our comprehensivesoftware modeling portfolio provides customers with a complete modeling and application development solution designed for complex 3D and HAR structuresin the most advanced logic and memory technology nodes.:•Nova MARS® - Nova MARS® software package is a multi-channel metrology modeling engine designed for the most advanced 3D structures inadvanced process nodes of semiconductor manufacturing. It’s a complete modeling solution for scatterometry and interferometry models’development, material characterization and recipe optimization which is crucial for facing increasing challenges in semiconductor metrology. TheNova MARS® also injects physical and process related knowledge to solve complex structures.•Nova FIT™ - Nova FIT™ modeling suite compliments traditional modeling of Optical Critical Dimensions by machine learning and data drivenalgorithmic solutions. The algorithmic suite works in conjunction with Nova MARS® physical modeling engine and Nova’s fleet managementsolution to improve metrology performance, speed up time to solution and expand metrology envelope for enriched process control. Nova FIT™embeds advanced machine learning and big data architecture into optical modeling, enhancing the way customers utilize metrology measurementdata to tighten process windows, avoid process excursions and improve yield.•Nova’s Centralized Fleet Management and Control - Nova’s Fleet Management and Performance Monitoring Center simplify the management andenhance the productivity of Nova tools in the fabrication site. The platform’s ability to process and analyze large amounts of fleet and metrologydata using advanced data analytic tools provides our customers with intelligent and predictive insights on tool performance and process trends.•Nova HPC® - The Nova HPC® is a High-Performance Computing solution, which is designed to accelerate NovaMARS® and NovaFIT™ workprocesses. Nova HPC® significantly expedites application development by accelerating library-building, real time regression and recipe-settingprocesses. Its advanced computing hardware design enables optimization of Nova’s proprietary algorithm performance, thus enabling the mostcalculation-demanding application development.Materials Stand-Alone MetrologyMaterials are considered the next frontier in advancing integrated circuits beyond dimensional and architectural scaling. The growing usage ofcomplex and novel materials in advanced technology nodes has increased the demand for metrology solutions that can measure materials properties, In Lineand In Die, with high precision and accuracy. Nova’s materials metrology offering utilizes powerful X-Ray and Raman technologies that have been optimizedto provide the automation, speed and reliability required in today’s advanced semiconductor production environment. As part of Nova’s strategic plan, Novaintends to increase its focus on the evolving materials engineering market. The demand to precisely characterize and control materials composition, thickness,stress and more, is growing in advanced Memory and Logic nodes and requires innovative metrology solutions. Our Nova ELIPSON™ and The VeraFlex®platforms aim to provide such capabilities.•VeraFlex® - Nova’s VeraFlex® combines enhanced XPS (X-Ray photoelectron spectroscopy) capability with a unique low energy XRF (X-Rayfluorescence) channel to address logic and memory device fabrication challenges. This innovative inline technology is a surface-sensitivequantitative spectroscopic technique that is used to determine the elemental composition of thin films.35•Nova ELIPSON™ - Nova ELIPSON™ utilizes Raman spectroscopy, a vibrational spectroscopy technique, to detect multiple material propertiessuch as strain, crystallinity, phases, grain size and composition. The combination of a small spot and high speed of this non-destructive, opticalmethod makes it a metrology of choice for both memory and logic segments.Our Customers, Sales and MarketingOur sales and marketing strategy is based mostly on direct sales channels where we engage with our customers from the early stages of processdevelopment, to address their challenges in the development phase, and later on support their technology transition to high volume production. We seek toestablish and maintain tight cooperative relationships with our customers by consistently providing them with a high level of service, support and newcapabilities. We have a global network of sales and marketing, customer service and applications support offices worldwide. Our teams are empowered byfrequent trainings, remote support options, online resources and rich marketing collateral.We serve all leading manufacturers in the logic, foundry and memory sectors of the integrated circuit manufacturing industry. Our e customers arelocated across Asia, Europe and North America.For the distribution of our total revenues, from products and services, by geographic areas, see Note 12A to our consolidated financial statements.The semiconductor industry is dominated by a small number of large companies. As a result, our sales are highly concentrated among a relativelysmall number of customers. The following table indicates the percentage of our total revenues derived from sales to our five largest customers and the range ofthese revenues from these customers for the periods indicated.201820192020Total revenues from five largest customers66%67%72%Range of revenues from five largest customers5%-20%3%-27%8%-26%CompetitionThe industries in which Nova operates are highly competitive and characterized by rapid technological change. Nova’s ability to compete generallydepends on its ability to introduce competitive solutions, commercialize its technology in a timely manner, continuously improve its products, and develop newproducts that meet the evolving customer requirements. Significant competitive factors include technical capability and differentiation, productivity, cost-effectiveness and the ability to support a global customer base. The importance of these factors varies according to customers’ needs, including product mix andrespective product requirements, applications, and the timing and circumstances of purchasing decisions. Substantial competition exists in all areas of Nova’sbusiness.36Competitors range from small companies that compete in a single region, which may benefit from policies and regulations that favor domesticcompanies, to global, diversified companies. Nova’s ability to compete requires a high level of investment in R&D, marketing and sales, and global customersupport activities.Research and DevelopmentWe have assembled a core team of experienced scientists and engineers who are highly skilled in their particular field or discipline. Our research anddevelopment core competencies, technologies and disciplines are in scatterometry, thin film metrology, XPS, interferometry, Raman Spectroscopy metrologyand semiconductor process control, and include multidisciplinary measurement instruments, complex system engineering, algorithms, physical modeling,optical design, interpretation software, machine learning, image acquisition, pattern recognition, X-ray energy sources, electron optics and detection, vacuumsystems and equipment integration. Our research and development staff consist of about 300 highly skilled members, approximately 70 of whom hold Ph.D.’s.In addition, we rely on independent subcontractors and consultants in various fields. Since June 2003, our research and development operations in Israel arecertified for ISO 9001 quality standard (Current ISO 9001:2015 version).The metrology and process control market is characterized by continuous technological development and product innovations. We believe that therapid and ongoing development of new products and enhancements to our existing product lines is critical to our success. Accordingly, we devote a significantportion of our technical, management and financial resources to developing innovative products, new applications and emerging innovative technologies.Our vision is to continue to be an innovative leader in the semiconductor process control market, through increasing our leadership in the Dimensionaland Materials metrology solutions, and our research and development efforts and activities are designed to support this vision. Our research and developmentefforts are structured through different and separate development projects, which are initiated following a detailed project plan, technical feasibility, and riskanalysis. The main projects are monitored throughout their life cycle in a structured process, including design reviews and project management reviews.In the frame of our research and development activities we participate from time to time in development consortium arrangements, which also help usto support our customers in the transition to advance technology nodes. These consortia are joint collaboration programs with other semiconductors companiesand are supported and funded by the IIA and\or European Joint Research. It should be noted, that in order to maintain our eligibility for these programs, wemust continue to meet certain conditions. These programs might restrict our ability to manufacture particular products and transfer particular technology, whichwere funded by the IIA. For additional information, see “Item 5C - Grants from the Israel Innovation Authority & European programs” in this annual report onForm 20-F.As part of our long-term technological collaboration, we are also engaged with joint development activities with some of our strategic customers, aswell as with research institutes and other semiconductor companies. These activities sometimes impose limitations on the joint intellectual property developedas part of these programs.37Patents and Other Proprietary RightsOur continued success depends upon our ability to protect our core technology and intellectual property. We therefore have an extensive programdevoted resources to seeking patent protection for our inventions and discoveries that we believe will provide us with competitive advantages. Our patents andapplications principally cover various aspects of optical measurement systems and methods, integrated process control implementation concepts, and optical,opto-mechanical and mechanical design. In addition, our patents and applications cover various aspects of X-ray based measurement systems and methods,including process control implementation concepts, X-ray energy sources, electron optics and detection, vacuum systems and equipment integration. To protectour proprietary rights, we also rely on a combination of copyrights, trademarks, trade secret laws, contractual provisions (e.g. confidentiality agreements) andlicenses. Our copyrights include software copyrights. We constantly seek to control access to, and distribution of our proprietary information, such as ourproprietary algorithms. We enter into confidentiality and proprietary rights agreements with our employees, consultants and business partners, and we controlaccess to and distribution of our proprietary information.Our in-house know-how is an important element of our intellectual property. The development and management of our products requires sophisticatedcoordination among many specialized employees. We believe that duplication of this coordination by competitors or individuals seeking to copy our productswould be difficult. The risk of a competitor effectively replicating the functionality of our products is further mitigated by the fact that most of the coretechnology operating on our systems is not exposed to a user or to our competitors. To protect our technology, we implement multiple layers of security.Despite our efforts to protect our proprietary rights, competitors may be able to develop similar technology independently or design around our patentsand, despite our efforts, our trade secrets may be disclosed to others. Furthermore, the laws of countries other than the U.S. may not protect our intellectualproperty to the same extent as the laws in the U.S. We also cannot assure that: (i) our pending patent applications will be approved; (ii) any patents granted willbe broad enough to protect our technology or provide us with competitive advantages or will not be successfully challenged or invalidated by third parties; or(iii) that the patents of others will not have an adverse effect on our ability to do business. We may also have to commence legal proceedings against thirdparties to protect our intellectual property.From time to time, we receive communications from others asserting that our products infringe or may infringe their intellectual property rights.Typically, our in-house patent counsel investigates these matters and, where appropriate, retains outside counsel to provide assistance. We are not presentlyinvolved in any material legal proceedings in which a third party has asserted that we have violated their intellectual property rights. If, however, we becomeinvolved in any such litigation and its outcome is adverse to us, it may result in a loss of proprietary rights, subject us to significant liabilities, including trebledamages in some instances, require us to seek licenses from third parties which may not be available on reasonable terms or at all, or prevent us from sellingour products. Furthermore, any litigation relating to intellectual property, even if we are ultimately successful, could result in substantial costs and diversion oftime and effort by our management. This in and of itself could have a negative impact on us. While we believe that we would be successful in any litigationseeking to enforce our patent rights, the ultimate outcome of any litigation or other legal proceedings cannot be predicted.38ManufacturingWe have one manufacturing facility for our Optical CD product lines, which is located in Ness-Ziona, Israel, and one manufacturing facility for our X-ray product line, which is located in Fremont, CA, US. In addition, we are expected to expand our production and development capabilities with a new state-of-the-art clean room in Rehovot Israel. We are now in the process of designing a highly advanced clean room facility that will support the company’s newlyintroduced technologies and continuous growth. The new clean room is expected to become operational during 2022. The new clean room facility is planned formanufacturing Nova’s most advanced platforms by utilizing state-of-the-art production methods. As part of Nova’s corporate social responsibility, theconstruction will also support high sustainability standards.Our principal manufacturing activities include assembly, integration, final testing and calibration. Our production activities are conducted in ourmanufacturing and repair center facility in Israel and in Fremont. We rely and expect to continue to rely on subcontractors and turnkey suppliers to fabricatecomponents, build subassemblies and perform other non-core activities in a cost-effective manner. While we use standard components and subassemblieswherever possible, most mechanical parts, metal fabrications, optical components and other critical components used in our products are engineered andmanufactured to our specifications. A small portion of these components and subassemblies are obtained from a limited group of suppliers, and occasionallyfrom a single source supplier.In order to leverage the relatively high volume of systems we manufacture, and in order to decrease production costs, we continue to focus our internalmanufacturing activities on processes that add significant value or require unique technology or specialized knowledge and outsource others. Our site in Israelreceived the ISO 9001 quality mark by an international certification institute in October 1999. Since then, we have upgraded our quality systems to conform toISO 9001:2015 requirements. We received the formal certification of ISO 14001 in 2010 which was upgraded to ISO 14001:2015 in 2016 and in 2014 wereceived the formal certification of OHSAS 18001:2007 for our manufacturing operations in Israel which was upgraded to ISO 45001 in 2019. We are beingannually recertified for these standards.Corporate Social Responsibility (CSR)In 2020 we have embraced a New Corporate Social Responsibility Strategy. We are determined to play a vital role in creating a world that valuesequality, safety and environmental health for the benefit of future generations to come. We are committed to proactively invest in embedding socialresponsibility as part of our culture and business management to support our values. Our CSR commitment is Inspired by Nova’s DNA and values, ofrespecting every individual, fostering partnerships and teamwork and seeing impossible as our starting point.39Built on our unique organizational culture where our employees feel safe and respected, with a strong sense of belonging and self-worth, Nova nowstrives to provide members of the community with resources to achieve the same. We invite our stakeholders into our socially responsible ecosystem, built onthe foundations of our ethical, social and environmental goals and execution, and hold them to the highest standards. Together with our excellent people anddevoted partners – we set out to generate true change by making a difference in people’s lives.Our strategy is built on five pillars:EnvironmentBuilding a Sustainable FutureWe strive to play our part in building a better future by protecting our environment and making a positive impact on the planet for thenext generations to inherit.CommunityRelationsLifting our CommunitiesWe welcome members of the community into our family and provide them with the resources required to promote equality, belongingand self-worthDiversityExpanding Cultural DiversityWe’re committed to building a diverse organization with a unique sense of belonging. We strive to expand our multidisciplinaryplatform with diverse talents and inspire the various segments of society.InclusionEmpowering Every VoiceOur organization fosters an inclusive, open-minded and accepting environment. We respect all individuals and ensure everyone is seen,heard, feel valued and respected.Ethics &GovernanceChampioning our EmployeesPeople at Nova always come first. We strive to create an ethical, safe and motivational workplace for our employees, one in which theybelong, while their privacy, interests and well-being are protected.In an effort to contribute to the sustainable development of society and to create new corporate value, we have addressed certain environmental issues.With respect to the environment, our new headquarters located in Rehovot, Israel is certified as “Leed Gold” - LEED (Leadership in Energy and EnvironmentalDesign), which is a widely used green building rating system and provides a framework for healthy, highly efficient, and cost-saving green buildings. LEEDcertification is a globally recognized symbol for sustainability achievement and leadership. In addition, we are committed to responsible sourcing of mineralsand have taken action to both increase transparency in our supply-chain and ensure responsible procurement by our suppliers and sub-suppliers. We conductconflict minerals due diligence pursuant to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. In general, our production does not involve industrial waste, and any waste that is created from used metal and electronics components is beingprocessed through authorized companies. We also implemented recycling measures in our facilities, and we use a mechanism for electricity saving in ouroffices.40Our Social responsibility is guided by our values and propels our culture to higher levels. In 2019 we moved our headquarters to a different facility inorder to create better working conditions and advanced accessibility options for the disabled. We hold an annual safety program which includes training andsafety drills for our employees and instituted a safety committee which is convened on a monthly basis to discuss safety measures. In 2020, we strived to recruitand promote an equal employment opportunity workforce. We built new strategic partnerships to ensure our open positions are exposed to new diversepopulations. With the help of our most valuable assets, our employees, we make a significant impact on our community by mentoring and tutoring projectstogether with numerous non-profit organizations worldwide. Our employees regularly participate in voluntary activity meant to make a difference in the lives ofthose in need.Since the COVID-19 outburst, we have been directing efforts, energies and much thought into helping the community around us during one of themost challenging periods we have ever known. We managed to donate funds to underprivileged families to enable their children to take part in "remotelearning". Nova also donated newly purchased tablets to Children-Oncology unit in several hospitals. Additionally, and specifically in this period, we donatedmoney for kids’ treatments at Shiba hospital. Through the pandemic spread we also supported our Chinese customers and community and donated masks andprotective gear to hospitals and sites in China. In the US, we donated to our local food bank to support those who lost their jobs or were affected by COVID-19.For details of our other corporate governance policies and practices, please refer to the following items in this report - Item 6. Directors, SeniorManagement and Employees, and Item 16G. Corporate Governance.Capital ExpendituresOur capital expenditures are primarily for network infrastructure, computer hardware and software, leasehold improvements of our facilities,expansion of clean room facilities and demonstration and development tools. None of these assets are held as collateral or guarantee other obligations. Foradditional information on our capital expenditures, see “Item 5B. Liquidity and Capital Resources” in this annual report on Form 20-F.Government RegulationFor information relating to the impact of certain government regulations on our business, see “Item 5.C – Grants from the Israel Innovation Authority”on this annual report on Form 20-F.4.C Organizational StructureOur SubsidiariesOur subsidiaries and the countries of their incorporation are as follows. All of our subsidiaries are wholly owned by the Company:Name of SubsidiaryCountry of Incorporation Nova Measuring Instruments, Inc.Delaware, U.S.Nova Measuring Instruments K.K.JapanNova Measuring Instruments Taiwan Ltd.TaiwanNova Measuring Instruments Korea Ltd.KoreaNova Measuring Instruments GmbHGermany414.DProperty, Plant and EquipmentOur main facilities, located in Rehovot and Ness-Ziona, Israel, are currently occupying an aggregate of approximately 13,000 square meters,including: approximately 2,000 square meters of production facilities, approximately 5,700 square meters of research and development offices (includingapproximately 1,400 square meters of laboratories) and approximately 5,000 square meters of headquarters, operations, sales and marketing, service andsupport and administration facilities.In September 2019, our Israel headquarters moved to a new building at the Science Park in Rehovot. The lease agreement in Rehovot is expected toextend until 2029. We have the option to extend this lease period by two periods of five years each, subject to customary conditions. The lease period for anadditional space of approximately 2,000 square meters in Rehovot, is expected to begin in 2021 and will extend through the same lease periods.The lease agreement in Ness Ziona is expected to extend until January 31, 2026. In 2020 we have terminated the lease of approximately 5,700 squaremeters of the facilities in Ness Ziona, which are no longer required for our operations.Our subsidiaries lease offices in various locations, for use as a research and development, manufacturing, service and pre-sale facility (depending oneach subsidiary’s needs). During 2019, our U.S. subsidiary, Nova Measuring Instruments, Inc. has moved into approximately 3,800 square meters of a newlyleased space, which includes approximately 850 square meters of production facilities. This facility lease will expire on March 31, 2026 (with, at NovaMeasuring Instruments, Inc.’s sole discretion, a right to extend the lease period for an additional five years). Our Taiwanese subsidiary leases a new space ofapproximately 1,750 square meters which includes a cleanroom facility, our Korean subsidiary leases approximately 1,000 square meters, our Europeansubsidiary leases approximately 200 square meters in Germany and France, and our Japanese subsidiary leases approximately 100 square meters.We believe that our facilities and equipment are in good operating condition and adequate for their present usage.Item 4A. Unresolved Staff CommentsNone.Item 5. Operating and Financial Review and ProspectsInformation in this Operating Review and Financial Prospects Section should be read in conjunction with our consolidated financial statements andnotes thereto which are included elsewhere in this report.Executive OverviewNova is a leading innovator and key provider of metrology solutions for advanced process control used in semiconductor manufacturing. Novadelivers continuous innovation by providing state-of-the-art high-performance metrology solutions for effective process control throughout the semiconductorfabrication lifecycle. We bring pioneering metrology solutions to the world of process control, by industrializing lab and research-grade technologies anddeveloping emerging metrology solutions. Nova’s product portfolio, deployed by the world’s largest integrated-circuit manufacturers, combines high-precisionhardware and cutting-edge software, provides its customers with deep insight into the development and production of the most advanced semiconductordevices. Nova’s unique capability to deliver innovative X-ray and Optical solutions enable its customers to improve performance, enhance product yields andaccelerate time to market. We market and sell our metrology systems mainly to semiconductor manufacturers, and in some cases to semiconductor processequipment manufacturers.42Our business is greatly affected by the level of spending on capital equipment by semiconductor manufacturers. In addition, demand for our productsand services is affected by the timing of new IC capacity expansion and ramping up of new technology nodes, by the timing of releasing products by us and ourcompetitors, market acceptance of our new or enhanced products and changes or improvements in semiconductor design or manufacturing processes.In the recent five years (2016-2020), we were able to achieve positive Compound Annual Growth Rate (CAGR) of products revenues of approximately13%, while Gartner Inc. estimates that the Process Control segment has achieved a CAGR of approximately 11% (Gartner Q4-2020 forecast, published onDecember 22, 2020). During these years, we successfully diversified our technology to include X-Ray capabilities on top of our Optical technology, to measureboth Dimensional and Material parameters, we added advanced machine learning algorithms on top of our physical modeling, and we advanced our traditionaltool set to include advanced capabilities in both hardware and software. We also diversified our revenue mix across semiconductor segments and territories.During these years, we were also able to increase our total available market through development of new technologies used for Materials and Dimensionsmetrology, addressing emerging applications in Memory and Foundry/Logic.In 2020, product sales accounted for approximately 77.7% of our total revenues, and services accounted for approximately 22.3%.As of the end of 2020, we had cash reserves, net of long term debt related to convertible bonds, of approximately $249.1 million, and working capitalof approximately $497.8 million.Our service organization is operating on a profit and loss basis and the objectives of our service organization are defined and measured by: customersatisfaction, quality support parameters; and by profit and loss criteria. The service organization provides support to all products we sell, during both thewarranty period and the post warranty period. Service revenues are mostly driven by extended warrant, Time and Materials requests, service contracts andproactive sales to the install base to improve productivity and metrology capabilities.Significant Events in 2020 and Outlook for 2021During 2020, we demonstrated several significant achievements:•Balanced geography distribution that yielded three large territories.•Diversified customer mix, including several major customers accounting for 10% or more of products’ revenues.•Balanced revenue mix between Memory and Foundry/Logic.43•Further market adoption of Nova’s advanced portfolio by leading wafer fabrication customers:oHardware and Software couplingoUnique Optical and X-Ray solutionsoHolistic offering, including Integrated and Standalone metrology•Continued investments in research and development programs aimed to generate new organic growth engines.•Introduction of several new generation Dimensional and Materials metrology platforms. We also continued rolling out Machine Learningmathematical algorithms to enhance metrology measurements and to complement the traditional Physical modeling.oIntroduction of new generation tools in both Integrated and Standalone Optical CDoIntroduction of NovaPrism™ – NovaPRISM™ is targeted at the most complex device manufacturing across the semiconductor segments.The solution combines revolutionary Spectral Interferometry (SI) technology with state-of-the-art multi-channel optical techniques enablingwide and unique spectral information offering.oIntroduction of ELIPSON™ – Nova ELIPSON™ is a high-end standalone metrology system, optimized for measuring material propertiessuch as composition, strain, crystallinity and surface properties, for both memory and logic segments. The platform utilizes Ramanspectroscopy for Optical Material Metrology (OMM) to extract material properties of the areas under analysis.•Deepening collaboration with several research institutes and customers' development centers, utilizing a variety of our products, leading to ourpositioning as a long-term technology development and high-volume manufacturing partner.•On October 2020, Nova concluded a pricing of $200 million aggregate principal amount of 0% Convertible Senior Notes due 2025 in a privateoffering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The raised funds will be utilized forfurther investment in the company growth and resiliency in order to enhance shareholders value.•CSR (Corporate Social Responsibility) – during 2020 we have built & embraced a New Corporate Social Responsibility Strategy. We are determinedto play a vital role in creating a world that values equality, safety and environmental health for the benefit of future generations to come. We arecommitted to proactively invest in embedding social responsibility as part of our culture and business management to support our values.44In 2021, we plan to focus on the following:•Continue to strengthen our competitive and market position, through unique innovation and technical leadership.•Continue our aggressive innovation and development plans for meeting future industry challenges.•Expand our total available market by addressing new emerging metrology applications and market segments, through solutions delivery to thechallenging buildup of advanced Logic technology nodes, memory scaled VNAND nodes and DRAM scaled devices at leading edge customers.•Continue delivery of advanced metrology systems to the trailing edge technology nodes to support new applications ramp up.•Continue our progress to meet Nova’s long-term strategic plan, which defines the Company’s growth path in revenue, customers, technology andfinancial performance, to support our profitable growth.•Continue leading the emerging metrology markets with innovative and disruptive solutions.•Continue the collaborations and joint research programs with leading semiconductor manufacturers and relevant leading research institutes.•Continue our products innovation and diversification through several new product introductions to extend the Company’s market leadership andtotal available market.•Continue our aggressive plans to generate revenues and competitive edge through SW algorithm products.•Strengthening the partnership with our customers and build a “Customer Centric” approach to accommodate and deliver customers’ requirementsalong the semiconductor lifecycle.The challenges and risks Nova faces in meeting its plans include:•Meeting strategic, development, operational and delivery targets in light of the COVID-19 global pandemic and the various influences across theworld.•On time delivery of the required solutions to meet the current and future needs of our existing and new customers.•Correctly understanding the market trends and competitive landscape to ensure our products retain proper differentiation to win customerconfidence.•Creating aggressive, innovative and competitive roadmap deliverables at reasonable costs in order to properly control expenses.•Identifying the metrology evolution roadmap for future industry needs to meet process control requirements and lead the market.•Achieving long-term growth targets while supporting global extensive growth in all our activities.•Building a solid infrastructure to accommodate further growth.45In order to address the risks and challenges associated with the COVID 19 pandemic Nova implemented a thorough and detailed global plan to securethe employees safety and health, guarantee supply chain resiliency, assure business continuity and continuous support to our customers.In order to address the technical and roadmap risks and challenges, we are working closely with leading customers’ development and research groupsand with the leading process equipment manufacturers as well as with leading technology research institutes. The purpose of working closely with these entitiesis to receive as early as possible information and feedback on their current and future metrology and process control needs and tune our roadmap to supportsuch needs.It is our belief that Nova has been able to consistently improve its market position as a result of a combination of factors:•Optical metrology has become an enabler for the entire industry over the last few years, sometimes on the account of other metrologycapabilities.•Material Metrology has been widely adopted by leading memory and logic/foundry customers.•Nova’s unique metrology portfolio, combining Optical and X-Ray metrology for both dimensions and materials, provide the most advancedsolution, combining the best innovative metrology capabilities with the best cost of ownership.•The ability to provide a unique and differentiated technology portfolio sets Nova apart from the competition and adding a competitive edge toour offering.•Our solutions are well accepted by leading customers that allow us to gain more market share with additional process steps and newapplications.•Our ability to closely team with our customers allows us to predict the industry evolution and process control challenges and by that introduceinnovative and advanced metrology solutions to solve industry needs.•Our diversified portfolio, which is a result of continuous investment in research and development, is becoming more attractive to ourcustomers.•Extending our solutions’ base to include hardware and software elements in a coupled offering.•Well controlled P&L and operating model to support our profitable growth plans and operational resiliency.Understanding the industry’s challenges for the next several years, it is our belief that we should continue our long-term growth as the adoption of oursolutions increases as a function of process complexity and industry development. We believe that our served addressable market is continuously expanding aswe penetrate to more steps of the semiconductor manufacturing processes and, as we continue innovating our portfolio for leading new emerging metrologyopportunities. We also believe that going forward, as the semiconductor process is becoming much more complicated with variety of challenges, the necessityfor our unique portfolio, combining multiple technologies for both Materials and Dimensional metrology, will grow in the next few years.46Critical Accounting PoliciesOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have beenprepared in accordance with the United States of America generally accepted accounting principles. We believe the following critical accounting policies,among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.Use of Estimates – GeneralThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Our management evaluates its estimates on an ongoing basis, including thoserelated to, but not limited to income taxes and tax uncertainties, collectability of accounts receivable, inventory accruals, fair value and useful lives of intangibleassets, and revenue recognition. These estimates are based on management's knowledge about current events and expectations about actions the Company mayundertake in the future. Actual results could differ from those estimates.Revenue RecognitionUnder ASC 606, the company derives revenue from the sales of advanced process control systems, spare parts, labor hours (mainly systemsinstallation) and service contracts.Revenues derived from sales of advanced process control systems, spare parts and labor hour are recognized at point in time, when control of thepromised goods or services is transferred to the customers, upon fulfillment of the contractual terms.Revenues derived from service contract, which generally specify fixed payment amounts and contractual terms for periods longer than one month, arerecognized ratably over time.The amount recognized reflects the consideration that the Company expects to be entitled to in exchange for those performance obligations.Revenues from sales which were not yet determined to be final sales due to acceptance provisions are deferred.Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performanceobligation based on its relative Standalone Selling Price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. TheCompany uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether there is a discountto be allocated based on the relative SSP of the various products and services.The Company enters into revenue arrangements that includes products and services which are generally distinct and accounted for as separateperformance obligations. The Company determines whether arrangements are distinct based on whether the customer can benefit from the product or service onits own or together with other resources that are readily available and whether the Company's commitment to transfer the product or service to the customer isseparately identifiable from other obligations in the contract.47InventoriesWe carry our inventory at the lower of either the actual cost or the net realizable value of the inventory. We regularly review inventory quantities onhand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for thenext twenty-four months. As demonstrated in the past, demand for our products can fluctuate significantly. A significant increase in the demand for our productscould result in a short-term increase in inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventoryquantities on hand, which could lead to losses. In addition, our industry is characterized by rapid technological change, frequent new product developments, andrapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, our estimates of future productdemand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In thefuture, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of suchdetermination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would berequired to recognize such additional operating income at the time of sale. Therefore, although we make every effort to ensure the accuracy of our forecasts offuture product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of ourinventory and our reported operating results.GoodwillGoodwill and other purchased intangible assets have been recorded as a result of the acquisition of ReVera. Goodwill represents the excess of thepurchase price in a business combination over the fair value of net tangible and intangible assets acquired, and related liabilities. Goodwill amount onDecember 31, 2020 was $20.1 million.Goodwill is not amortized, but rather is subject to an impairment test. In accordance with ASC 350, “Intangibles – Goodwill and Other”, at leastannually (in the fourth quarter), or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Company has anoption to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying valueprior to performing the quantitative goodwill impairment test. The Company operates in one operating segment, and this segment comprises its only reportingunit.Following the adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment", as part of the quantitative goodwill impairment test, anyexcess of the carrying value of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down tothe fair value of the reporting unit. For the year ended December 31, 2020, we performed an annual impairment analysis, and no impairment losses have beenidentified.Intangible assetsAs a result of the acquisition of ReVera in April 2015, our balance sheet included acquired intangible assets, in the aggregate amount of approximately$7.6 million and $5.1 million as of December 31, 2019 and 2020, respectively.In 2015, we allocated the purchase price of ReVera to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fairvalues. These valuations require management to make significant estimations and assumptions, especially with respect to intangible assets. Critical estimates invaluing intangible assets include future expected cash flows from technology acquired, backlog and customer relationships. Management’s estimates of fairvalue are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.48Intangible assets are comprised of acquired technology, customer relations, backlog and IP R&D.For the year ended December 31, 2020, we performed an annual impairment analysis for Goodwill, and no impairment losses have been identified.Accounting for income taxWe are subject to income taxes in Israel, the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating ouruncertain tax positions and determining our taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome ofthese matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changingfacts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is differentthan the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made.We have accounted for the tax effects of the Tax Cuts and Jobs Act, which we refer to as the Tax Act, enacted on December 22, 2017, on a provisionalbasis. Our accounting for certain income tax effects is incomplete, but we have determined reasonable estimates for those effects. Our reasonable estimates areincluded in our financial statements as of December 31, 2020.Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuationallowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies.In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with acorresponding impact to the provision for income taxes in the period in which such determination is made.Convertible senior notesThe Company accounts for its convertible senior notes in accordance with ASC 470-20 "Debt with Conversion and Other Options". Pursuant to ASCSubtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that may be settled wholly or partially in cash upon conversion are requiredto separately account for the liability (debt) and equity (conversion option) components of the instrument. The liability component at issuance is recognized atfair value, based on the fair value of a similar instrument of similar credit rating and maturity that does not have a conversion feature. The equity component isbased on the excess of the principal amount of the convertible senior notes over the fair value of the liability component and is recorded in additional paid-incapital. The equity component, net of issuance costs and deferred tax effects is presented within additional paid-in-capital and is not remeasured as long as itcontinues to meet the conditions for equity classification. The difference between the principal amount and the liability component represents a debt discountthat is amortized to financial expense over the respective terms of the Notes using an effective interest rate method. The Company allocated the total issuancecosts incurred to the liability and equity components of the convertible senior notes based on their relative values.Issuance costs attributable to the liability and equity components were $5,894 and $518, respectively. Issuance costs attributable to the liability arenetted against the principal balance and will be amortized to financial expense using the effective interest method over the contractual term of the notes. Theeffective borrowing rate of the liability component of the notes (after deduction of the abovementioned issuance costs attributed to the liability component) is2.365%. This borrowing rate was based on Company's synthetic credit risk rating.For a discussion of other significant accounting policies used in the preparation of our financial statements and recent accounting pronouncements, seeNote 2 to our consolidated financial statements contained elsewhere in this report.New Accounting PronouncementsFor information regarding new accounting pronouncements, see Note 2W to our consolidated financial statements contained elsewhere in this annualreport.5.AOperating ResultsOverviewA substantial portion of our revenues is coming from a small number of customers, and we anticipate that our revenues will continue to depend on alimited number of major customers.For the distribution of our total revenues, from products and services, by geographic areas, see Note 12A to our consolidated financial statements.49The sales cycle of our systems is long and the rate and timing of customer orders may vary significantly from month to month as a function of thespecific timing of fab expansions. We schedule production of our systems based upon order backlog and customer forecasts.Our revenues increased by 19.8% in 2020 following a decrease of 10.4% in 2019, and an increase of 13.1% in 2018.The following table shows the relationship, expressed as a percentage, of the listed items from our consolidated income statements to our totalrevenues for the periods indicated:Percentage of Total RevenuesYear ended December 31,201820192020 Revenues from product77.0%74.3%77.7%Revenues from services23.0%25.7%22.3% Total revenues100.0%100.0%100.0% Cost of revenues products28.6%29.9%29.2%Cost of revenues services13.6%15.9%14.1%Total cost of revenues42.2%45.8%43.2% Gross profit57.8%54.2%56.8% Operating expenses:Research and development, net18.1%19.8%19.7%Sales and marketing11.1%12.5%10.9%General and administrative3.5%4.5%4.6%Amortization of intangible assets1.1%1.2%0.9% Total operating expenses33.8%38.0%36.1% Operating income24.1%16.2%20.6% Financial income, net1.2%1.4%0.3%Income before income taxes25.3%17.6%21.0% Income tax expenses3.6%1.9%3.2% Net income21.7%15.6%17.8%Comparison of Years Ended December 31, 2020 and 2019Revenues. Our revenues in 2020 increased by $44.5 million, or 19.8%, compared to 2019. Revenues attributable to product sales were $209.3 million,an increase of $42.1 million, or 25.2%, compared to 2019. Revenues attributable to services were $60.1 million, an increase of $2.4 million, or 4.1%, comparedto 2019. The increase in product revenues in 2020 was attributed to higher demand for our products across all main product lines, including revenues from newproduct line introduced in 2020. The increase in services revenues in 2020 was attributed mainly to the increase in our systems installed base in recent years.50Cost of Revenues and Gross Profit. Cost of revenues consists of labor, material and overhead costs of manufacturing our systems, royalties, and thecosts associated with our worldwide service and support infrastructure. It also consists of inventory write-offs and provisions for estimated future warrantycosts for systems we have sold. Our cost of revenues attributable to product sales in 2020 was $78.6 million. Our gross margin attributable to product revenuesin 2020 was 62.5%, compared to 59.7% in 2019. The increase in products gross margins in 2020 is related mainly to the increase in sales and to a differentproduct mix.Our cost of services in 2020 was $37.9 million, compared to $35.8 million in 2019. Gross margin attributable to service revenues in 2020 was 36.9%,compared to 38.0% in 2019. The decrease in services gross margins in 2020 is related mainly to different service revenue mix which included higher portion oftime and materials resulting in higher materials costs and higher personnel costs that were partially offset by decrease in travel expenses due to the COVID-19travel restrictions.Research and Development Expenses, net. Consist primarily of salaries and related expenses and also include consulting fees, subcontracting costs,related materials and overhead expenses, after offsetting grants received or receivable from the IIA and the European Community, as well as other funding forresearch and development activities. Our net research and development expenses in 2020 were $53.0 million, an increase of $8.5 million, or 19.1%, comparedto 2019, after offsetting grants received of $5.6 million in 2020 and $6.9 million in 2019. Research and development expenses excluding grants received orreceivable in 2020 were $58.6 million, compared to $51.4 million in 2019, and increased due to higher investment in new products and technologies and higherpersonnel costs. In 2020, net research and development expenses represented 19.7% of our revenues, compared to 19.8% of our revenues in 2019.Sales and Marketing Expenses. Sales and marketing expenses are mainly comprised of salaries and related costs for sales and marketing personnel,travel related expenses, overhead and commissions to our representatives and sales personnel. Our sales and marketing expenses in 2020 were $29.3 million, anincrease of $1.1 million, or 3.9%, compared to 2019. The increase in sales and marketing expenses in 2020 was mainly attributed to the higher personnel costsoffset by decrease in travel expenses due to the COVID-19 travel restrictions. Sales and marketing expenses represented 10.9 % our revenues in 2020 comparedto 12.5% of our revenues in 2019.Amortization of Intangible Assets. As part of the acquisition of ReVera on April 2, 2015, the Company acquired $12.3 million of intangible assetrelated to technology. In 2020 and 2019, the Company recorded $2.5 million and $2.6 million of amortization of intangible assets respectively.General and Administrative Expenses. General and administrative expenses are comprised of salaries and related expenses and other non-personnelrelated expenses such as legal expenses. Our general and administrative expenses in 2020 were $12.5 million, an increase of $2.4 million, or 24.3%, comparedto 2019. The increase in general and administration expenses was attributed mainly to higher personnel costs and related overhead, including costs related toour new headquarters facility in Israel. In 2020, general and administration expenses represented 4.6% of our revenues, compared to 4.5% of our revenues in2020.51Income Tax Expenses. Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. In 2020, we recorded $8.6million of income tax expenses, reflecting effective tax rate of 15.2 %. In 2019, we recorded $4.3 million of income tax expenses, reflecting effective tax rate of10.9%. The increase in the effective tax rate in 2020 is attributed mainly to US territory tax benefits which were recorded in 2019.Comparison of Years Ended December 31, 2019 and 2018Revenues. Our revenues in 2019 decreased by $26.2 million, or 10.4%, compared to 2018. Revenues attributable to product sales were $167.2 million,a decrease of $26.1 million, or 13.5%, compared to 2018. Revenues attributable to services were $57.7 million, a decrease of $0.1 million, or 0.2%, comparedto 2018. The decrease in product revenues in 2019 was attributed to both OCD and XPS products, due to the decrease in WFE investments in 2019.Cost of Revenues and Gross Profit. Cost of revenues consists of labor, material and overhead costs of manufacturing our systems, royalties, and thecosts associated with our worldwide service and support infrastructure. It also consists of inventory write-offs and provisions for estimated future warrantycosts for systems we have sold. Our cost of revenues attributable to product sales in 2019 was $67.3 million. Our gross margin attributable to product revenuesin 2019 was 59.7%, compared to 62.9% in 2018. The decrease in products gross margins in 2019 is related mainly to the decrease in sales and to a differentproduct mix including transition to new product generations which are bearing higher costs.Our cost of services in 2019 was $35.8 million, relative to $34.2 million in 2018. Gross margin attributable to service revenues in 2019 was 38.0%,compared to 40.9% in 2018. The decrease in services gross margins in 2019 is related mainly to the higher personnel costs in that year.Research and Development Expenses, net. Consist primarily of salaries and related expenses and also include consulting fees, subcontracting costs,related materials and overhead expenses, after offsetting grants received or receivable from the IIA and the European Community, as well as other funding forresearch and development activities. Our net research and development expenses in 2019 were $44.5 million, a decrease of $0.9 million, or 2.1%, compared to2018, after offsetting grants received of $6.9 million in 2019 and $5.8 million in 2018. Research and development expenses excluding grants received orreceivable in 2019 were $51.4 million, compared to $51.2 million in 2018. In 2019, net research and development expenses represented 19.8% of our revenues,compared to 18.1% of our revenues in 2018.Sales and Marketing Expenses. Sales and marketing expenses are mainly comprised of salaries and related costs for sales and marketing personnel,travel related expenses, overhead and commissions to our representatives and sales personnel. Our sales and marketing expenses in 2019 were $28.2 million, anincrease of $0.2 million, or 0.8%, compared to 2018. The increase in sales and marketing expenses in 2019 was mainly attributed to increase in marketing costsrelated to systems evaluation processes by customers. Sales and marketing expenses represented 12.5 % our revenues in 2019 compared to 11.1% of ourrevenues in 2018.Amortization of Intangible Assets. As part of the acquisition of ReVera on April 2, 2015, the company acquired $12.3 million of intangible asset relatedto technology. In both 2019 and 2018, the company recorded $2.6 million of amortization of intangible assets.52General and Administrative Expenses. General and administrative expenses are comprised of salaries and related expenses and other non-personnelrelated expenses such as legal expenses. Our general and administrative expenses in 2019 were $10.1 million, an increase of $1.3 million, or 15.2%, comparedto 2018. The increase in general and administration expenses was attributed mainly to new facilities related costs. In 2019, general and administration expensesrepresented 4.5% of our revenues, compared to 3.5% of our revenues in 2018.Income Tax Expenses. Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. In 2019, we recorded $4.3million of income tax expenses, reflecting effective tax rate of 10.9 %. In 2018, we recorded $9.1 million of income tax expenses, reflecting effective tax rate of14.3%. The decrease in the effective tax rate in 2019 is attributed mainly to US territory tax benefits, including benefits related to US Tax Cuts and Jobs Act.5.BLiquidity and Capital ResourcesAs of December 31, 2020, we had working capital of approximately $497.8 million compared to working capital of approximately $256.7 million as ofDecember 31, 2019. The increase in our working capital is related mainly to our fluent profits and the Convertible Senior Notes offering which we completed inOctober 2020.Cash and cash equivalents, short-term and long-term deposits as of December 31, 2020 were $427.9 million compared to $191.1 million as ofDecember 31, 2019, and increased mainly as a result our fluent operating cash flow and the Convertible Senior Notes offering which we completed in October2020.Trade accounts receivables increased from $51.6 million as of December 31, 2019 to $63.3 million as of December 31, 2020.Inventories increased from $48.4 million as of December 31, 2019 to $61.7 million as of December 31, 2020. The increase in inventory is related tothe introduction of new products and to the increase in our global inventories related to services, and to our decision to manufacture in full capacity during theCOVID-19 environment.Operating activities in 2020 generated positive cash flow from operating activities of $60.3 million compared to a positive cash flow from operatingactivities of $40.7 million in 2019. The increase in operating cash flow in 2020 is mainly related to higher profitability and to effective collection of accountsreceivables in 2020 relative to 2019.The following table describes our investments in capital expenditures during the last three years:201820192020DomesticAbroadDomesticAbroadDomesticAbroad(US dollars, in thousands)Electronic equipment2,4002373,9754182,742431Office furniture and equipment21192,19260428510Leasehold improvements49350811,2312,8491,865867Total2,91476417,3983,8714,6351,808In 2020, the investment in capital expenditures was financed from our fluent operating cash flow, and included major investments in leaseholdimprovements in our new facilities in Israel and the US. In 2021, we expect our capital spending, to be approximately $10 million.53Our principal liquidity requirement is expected to be for working capital and capital expenditures, as well as additional acquisitions. We believe thatour current cash reserves will be adequate to fund our planned activities for at least the next twelve months. Our long-term capital requirements will be affectedby many factors, including the success of our current products, our ability to enhance our current products and our ability to develop and introduce newproducts that will be accepted by the semiconductor industry. We plan to finance our long-term capital needs with our cash reserves together with positive cashflow from operations, if any. If these funds are insufficient to finance our future business activities, which may include acquisitions, we would have to raiseadditional funds through the issuance of additional equity or debt securities, through borrowing or through other means. We cannot assure that additionalfinancing will be available on acceptable terms.Presently, our long-term debt is comprised from Convertible Senior Notes. We do not have a readily available source of long-term debt financing suchas a line of credit.With regard to usage of hedging financial instruments and the impact of inflation and currency fluctuations, see “Item 11. Quantitative and QualitativeDisclosures about Market Risk” in this annual report on Form 20-F.5.CResearch and Development, Patents and Licenses, etc.For information regarding our research and development activities, see “Item 4B – Research and Development” in this annual report on Form 20-F.Grants from the Israeli Innovation Authority & European ProgramsIIA sponsoring for generic research and development projects of large Israeli companiesWe participate in a generic research and development programs sponsored by the IIA, available for Israeli companies that meet specific criteria’s setforth by the IIA. Companies eligible to participate in these programs receive IIA funding intended to focus on long-term creation of know-how andtechnological infrastructure, used for the development or production of future innovative products. These programs do not require payments of royalties to theIIA, but all other restrictions under the Innovation Law, such as local manufacturing obligations and know-how transfer limitations, as further detailedhereunder, are applicable to the know how developed by us with the funding received in such programs.IIA sponsoring for Israeli research and development consortiumsIn 2020 and 2019, and in previous years, we participated in a consortium program sponsored by IIA. Under the terms of this program, we cooperatewith additional companies, Universities and research institutes in Israel, organized in a consortium for the development of new technologies. The rules of theconsortium include several references to the distribution of knowledge between the consortium members, requires us to provide the other members in theconsortium with a non-sub-licensable license to use the “new information” developed by such member, without consideration. These programs do not requirepayments of royalties to the IIA, but all other restrictions under the Innovation Law, such as local manufacturing obligations and know-how transfer limitations,as further detailed hereunder, are applicable to the know how developed by us with the funding received in such programs.54Joint programs of the European Research Area and the IIAWe participate in European consortiums, which are joint programs governed by the Electronic Component Systems for European Leadership JointUndertaking (the “JU”) as part of the Horizon 2020 cooperation between the European Research Area and the IIA (the “EU Consortiums”).Some of the obligations and undertakings specified hereunder in connection with our IIA activities (such as the restrictions under the Innovation Lawand obligation to grant certain access rights to our technology and intellectual property rights) apply with respect to these joint projects. In addition, theparticipation in an EU Consortium includes specific obligations, such as the following: The budgeted grant will be paid to the company pursuant to certain rulesregarding ‘eligible costs’; Obligation to properly implement the activities assigned under the specific EU Consortium project; Restrictions in contributions ofthird parties (by service or otherwise); Obligation to keep information up to date and to inform about events and circumstances likely to affect the consortiumactivity; Obligations related to records keeping, investigations and audits by the JU in order to verify the proper implementation of the specific EU Consortiumproject and compliance with the obligations under the terms of the program, including assessing deliverables and reports during a period of up to two yearsfollowing the receipt by the company of the full grant payment; Obligations related to Intellectual property allocation generated by an EU Consortium,background intellectual property designation prior to the commencement of the EU Consortium’s project and the provision of access rights to results obtainedas part of the EU Consortium. Breach of such obligations may result in the reduction of the aggregate expected grant amount or claiming back previouslyreceived grants. In addition, the company may be subject to administrative and financial penalties such as temporary exclusion from all JU EuropeanConsortiums and fines of up to 10% of the maximum expected grant, as well as to contractual liabilities.Past royalty bearing programs and royalties arrangementsSome of our previous research and development efforts were financed in part through royalty-bearing grants. We were obligated to pay royalties of 5%in 2016 and 2015 and in previous years, of revenues derived from sales of products funded with these grants. This obligation included different annual interestrates ranging up to 5%. In August 2016, we entered into a royalty buyout arrangement, or the Arrangement, with the IIA. As part of the Arrangement we paidapproximately $12.9 million to the IIA in September 2016. The contingent net royalty liability to the IIA at the time we executed the Arrangement wasapproximately $24 million. As a result of the foregoing payment, we are released from any future royalty payments on these previous funds received from theIIA. However, to the extent that we will be able to commercialize products that were developed as part of IIA programs and were declared as “failed” at thetime of the Arrangement, we will be required to pay royalties to the IIA from income generated from such commercialization. Currently, we do not anticipatethat such failed projects will generate revenues in the future. We note that the Arrangement does not release the Company from other obligations towards theIIA as further detailed herein. In addition, in the future, we may, alone or together with third parties, participate in research and development programs, whichmay bear royalty obligations (depending on the specific terms of the applicable program).55Pertinent obligations under the Israeli Encouragement of Research, Development and Technological Innovation in the Industry Law 1984Under the Encouragement of Research, Development and Technological Innovation in the Industry Law 1984 and the provisions of the applicableregulations, rules, procedures and benefit tracks, together the Innovation Law, a qualifying research and development program is typically eligible for grants ofup to 50% of the program’s pre-approved research and development expenses. The program must be approved by a committee of the IIA. The recipient of thegrants is required to return the grants by the payment of royalties on the revenues generated from the sale of products (and related services) developed (in wholeor in part) under IIA program up to the total amount of the grants received from IIA, linked to the U.S. dollar and bearing annual interest (as determined in theInnovation Law). Following the full payment of such royalties and interest, there is generally no further liability for royalty payment for our currentlydeveloped and sold products. Nonetheless, the restrictions under the Innovation Law (as generally specified below) will continue to apply even after ourcompany has repaid the grants, including accrued interest, in full.The main pertinent obligations under the Innovation Law are as follows:•Local Manufacturing Obligation. The terms of the grants under the Innovation Law require that we manufacture the products developed with thesegrants in Israel. Under the regulations promulgated under the Innovation Law, the products may be manufactured outside Israel by us or by anotherentity only if prior approval is received from the IIA (such approval is not required for the transfer of less than 10% of the manufacturing capacity inthe aggregate, as declared to be manufactured out of Israel in the applications for funding, in which case a notice should be provided to the IIA). Thisapproval may be given only if we abide by all the provisions of the Innovation Law and related regulations. Ordinarily, as a condition to obtainingapproval to manufacture outside Israel, we would be required to pay royalties at an increased rate (usually 1% in addition to the standard rate andincreased royalties cap between 120% and 300% of the grants, depending on the manufacturing volume that is performed outside Israel). We note thata company also has the option of declaring in its IIA grant application an intention to exercise a portion of the manufacturing capacity abroad, thus, ifthe grant application is approved by IIA, such company will avoid the need to obtain additional approvals and pay the increased royalties cap formanufacturing outside of Israel at portions which were mentioned in such approved grant applications.•Know-How transfer limitation. The Innovation Law restricts the ability to transfer know-how funded by the IIA outside of Israel, including by way ofa license to a non-Israeli entity. Transfer of IIA funded know-how outside of Israel requires prior approval of the IIA. The IIA approval to transferknow-how created, in whole or in part, in connection with an IIA-funded project to third party outside Israel is subject to payment of a redemption feeto the IIA calculated according to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grantsto the company’s aggregate investments in the project that was funded by these IIA grants, multiplied by the transaction consideration, taking intoaccount depreciation mechanism, and less royalties already paid to the IIA. The regulations promulgated under the Innovation Law establish amaximum payment of the redemption fee paid to the IIA under the above mentioned formulas and differentiates between two situations: (i) in theevent that the company sells its IIA funded know-how, in whole or in part, or is sold as part of an M&A transaction, and subsequently ceases toconduct business in Israel, the maximum redemption fee under the above mentioned formulas will be no more than six times the total grants received(plus accrued interest) for development of the know-how being transferred, or the entire amount received from the IIA, as applicable; (ii) in the eventthat following the transactions described above (i.e., asset sale of IIA funded know-how or transfer as part of an M&A transaction) the companyundertakes to continue its R&D activity in Israel (for at least three years following such transfer and maintain at least 75% of its R&D staff employeesit had for the six months before the know-how was transferred, while keeping the same scope of employment for such R&D staff), then the company iseligible for a reduced cap of the redemption fee of no more than three times the amounts received (plus accrued interest) for the applicable know-howbeing transferred, or the entire amount received from the IIA, as applicable. No assurance can be given that approval to any such transfer, if requested,will be granted and what will be the amount of the redemption fee payable.56Approval of the transfer of IIA funded technology to another Israeli company requires a pre-approval by IIA and may be granted only if the recipientundertakes to fulfil all the liabilities to IIA and undertakes abides by all the provisions of the Innovation law and related regulations, including therestrictions on the transfer of know-how and manufacturing rights outside of Israel and the obligation to pay royalties. In light of the Arrangement (asfurther discussed below), in certain circumstances, under such sale transactions (i.e., the transfer of IIA funded technology or portion thereof to anotherIsraeli company), we might be obligated to pay royalties to the IIA from any income derived from such a sale transaction.•Licensing arrangements. Under the terms of the Innovation Law, licensing know how developed under the IIA programs outside of Israel, requiresprior consent of IIA and payment of license fees to IIA, calculated in accordance with the licensing rules promulgated under the Innovation Law. Thepayment of the license fees does not discharge the company from the obligation to pay royalties or other payments due to IIA in accordance withInnovation Law.These restrictions may impair our ability to enter into agreements for those products or technologies which were developed with assistance of the IIAgrants without the approval of the IIA. We cannot be certain that any approval of the IIA will be obtained on terms that are acceptable to us, or at all.Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of know-how developed with IIA funding pursuant to amerger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay to the IIA. Any approval, ifgiven, will generally be subject to additional financial obligations. Failure to comply with the requirements under the Innovation Law may subject us tomandatory repayment of grants received by us (together with interest and penalties), as well as may expose us to criminal proceedings. In addition, IIA mayfrom time-to-time audit sales of products which it claims incorporate technology funded via IIA programs and this may lead to additional royalties beingpayable on additional products.5.DTrend InformationFor Information regarding most significant recent trends in our market, see “Item 4B– Our Market – The World Economy – Update” in this annualreport on Form 20-F.5.EOff-Balance Sheet ArrangementsWe do not have and are not party to any off-balance sheet arrangements.575.FTabular Disclosure of Contractual ObligationsAs of December 31, 2020, we had contractual obligations as described in the following table:Payment due by Period (US Dollars, in $ thousands)TotalLess than 1 year2-3 years4-5 yearsMore than 5yearsPurchase Obligations41,02738,6602,3625-Item 6. Directors, Senior Management and Employees6.A Directors and Senior ManagementThe following is the list of senior management and directors as of February 16, 2021:NameAgePositionMichael Brunstein (3)77Chairman of the Board of DirectorsAvi Cohen (1)67DirectorRaanan Cohen (2)65DirectorZehava Simon (1)(2)(3)62Director (External Director until May 2018)Dafna Gruber (1)(2)55Director (External Director until May 2018)Ronnie (Miron) Kenneth (2)(3)64DirectorEitan Oppenhaim55Director, President and Chief Executive OfficerDror David51Chief Financial OfficerShay Wolfling49Chief Technology OfficerGabriel Waisman50Chief Business OfficerAdrian S. Wilson49President of US subsidiary & General Manager Material Metrology DivisionGabi Sharon59Chief Operations OfficerSharon Dayan48Chief Human Resources OfficerZohar Gil54Chief Marketing and Business Development OfficerEffi Aboody50Corporate VP and General Manager Dimensional Metrology Division (1)Member of the audit committee (2)Member of the compensation committee (3)Member of the Nominating committeeDr. Michael Brunstein was named chairman of our board of directors in June 2006, after serving as member of our board of directors from November2003. During the years 1990 and 1999, Dr. Brunstein served as Managing Director of Applied Materials Israel Ltd. Prior to that, Dr. Brunstein served asPresident of Opal Inc., and as a Director of New Business Development in Optrotech Ltd. Dr. Brunstein holds a B.Sc. in Mathematics and Physics from TheHebrew University, Jerusalem, and a M.Sc. and a Ph.D. in Physics from Tel Aviv University, Israel.Mr. Avi Cohen has served as a director of the Company since 2008. He also, serves on the board of directors of Cortica Ltd., CGS Tower NetworksLtd. and BioFishency Ltd. From July 2016 to September 2017 Mr. Cohen served as the chief executive officer of MX1, a global media service providerfounded in July 2016 as a result of the acquisition of RR Media (Nasdaq: RRM) by SES S.A. and the following merger between RR Media, and SES PlatformServices GmbH. From July 2012 till the merger, Mr. Cohen served as the chief executive officer of RR Media. Prior to that, until March 2012, Mr. Cohenserved as president and chief executive officer of Orbit Technologies, a public company traded on the TASE. From September 2006 to December 2008, Mr.Cohen served as chief operating officer and deputy to the chief executive officer of ECI Telecom Ltd. a leading supplier of networking infrastructureequipment. Prior to joining ECI, Mr. Cohen served in a variety of executive management positions at KLA (Nasdaq: KLAC). From 2003 he was a group vicepresident, corporate officer and member of the executive management committee. During his tenure, he successfully led the creation of KLA’s globalMetrology Group. From 1995 he was the president of KLA Israel responsible for the optical metrology division. Prior to joining KLA, Mr. Cohen also spentthree years as managing director of Octel Communications, Israel, after serving as chief executive officer of Allegro Intelligent Systems, which he founded andwhich was acquired by Octel. Mr. Cohen holds B.Sc. and M.Sc. degrees in electrical engineering and applied physics from Case Western Reserve University,USA.58Mr. Raanan Cohen was appointed as a director of the Company by our board of directors in February 2014. Prior to that and until December 2012, Mr.Cohen has served as the President and Chief Executive Officer of Orbotech Ltd., a public company traded on Nasdaq. Mr. Cohen has also served in a range ofother executive positions at Orbotech Ltd, including Co-President for Business and Strategy, EVP and President of the Printed Circuit Board (PCB) Division,Vice President for the PCB-AOI product line and President and chief executive officer of Orbotech, Inc. Prior to its merger with Orbotech in 1991, Mr. Cohenheld various positions at Orbot, another manufacturer of AOI systems. Prior to joining Orbot in 1984, he worked at Telrad Networks Ltd. Mr. Cohen currentlyserves as the Chief Executive Officer of EyeWay Vision Ltd., a private company. Mr. Cohen holds a B.Sc. in Computer Science from the Hebrew University inJerusalem, Israel.Ms. Zehava Simon was elected as the Company’s external director in accordance with the provisions of the Companies Law in June 2014 and reelectedin June 2017. Effective as of May 2018, and our adoption of the exemption under the Regulation (as defined below), Ms. Simon is no longer classified as anexternal director under the Companies Law. Ms. Simon served as a Vice President of BMC Software from 2000 until 2013 and in her last position (as of 2011)acted as Vice President of Corporate Development. From 2002 to 2011, Ms. Simon served as Vice President and General Manager of BMC Software in Israel.In this role, she was responsible for directing operations in Israel and India as well as offshore sites. Prior to that, Ms. Simon held various positions at IntelIsrael., which she joined in 1982, including leading of Finance & Operations and Business Development for Intel in Israel. Ms. Simon is currently a boardmember of Audiocodes Ltd., a public company traded on Nasdaq and TASE, Nice Systems, a public company traded on Nasdaq and TASE. Ms. Simon is aformer member of the board of directors of Insightec Ltd. (2005-2012), M-Systems Ltd., a Nasdaq listed company which was acquired in 2006 by SanDiskCorp., a public company traded on Nasdaq as well (2005-2006) and Tower Semiconductor Ltd., a public company traded on TASE and Nasdaq (1999-2004).Ms. Simon holds a B.A. in Social Sciences from the Hebrew University, Jerusalem, Israel, a law degree (LL.B.) from the Interdisciplinary Center in Herzliyaand an M.A. in Business and Management from Boston University, USA.Ms. Dafna Gruber was elected as the Company’s external director in accordance with the provisions of the Companies Law in April 2015 andreelected in April 2018. Effective as of May 2018, and our adoption of the exemption under the Regulation, Ms. Gruber is no longer classified as an externaldirector under the Companies Law. Ms. Gruber has broad experience, serving as chief financial officer and a senior executive management member in leadinghi-tech companies traded on both Nasdaq and TASE. From February 2019 until February 2021, Ms. Gruber served as chief financial officer of Aqua securityLtd., a private company. From September 2017 until February 2019, Ms. Gruber served as the chief financial officer of Landa Corporation Ltd., and then asfinancial advisor to Landa group. From 2015 until 2017, Ms. Gruber served as the chief financial officer of Clal Industries Ltd., a private company. From 2007until 2015, Ms. Gruber served as the chief financial officer of Nice Systems Ltd., a public company traded on Nasdaq and TASE. As a member of the seniormanagement team, Ms. Gruber was a senior member of the strategy and M&A forum of the company. During her employment with Nice, Ms. Gruber wasresponsible, inter alia, for finance, operation, MIS and IT, legal and investor relations. From 1996 until 2007, Ms. Gruber was part of Alvarion Ltd., a publiccompany traded on Nasdaq and TASE, mostly as chief financial officer. Prior to that, from 1993 to 1996, Ms. Gruber was a controller at Lannet DataCommunications Ltd., subsequently acquired by Lucent Technologies Inc. Ms. Gruber serves as an external director at TAT Technologies Ltd., a publiccompany traded on Nasdaq and TASE, since November 2013, as an external director at Tufin software technologies Ltd., a public company traded on NYSEsince April 2019 and as an independent director at Cognyte Ltd, a public company traded on Nasdaq. Ms. Gruber is a certified public accountant and holds aBachelor’s degree in Accounting and Economics from Tel Aviv University, Israel.59Mr. Ronnie (Miron) Kenneth was appointed to serve as a director of the Company by our board of directors in December 2017 and was reappointed byour shareholders in April 2018. Mr. Kenneth is a veteran high-tech leader who served for ten years as Chairman and Chief Executive Officer at VoltaireTechnologies Ltd. (Nasdaq: VOLT), leading it to an initial public offering on Nasdaq in 2007. Following Voltaire’s merger with Mellanox Technologies Ltd.(Nasdaq: MLNX) in 2011, Mr. Kenneth became the Chief Executive Officer of Pontis Ltd., a privately-held company, until 2013. Mr. Kenneth currently servesas the Chairman of Teridion Technologies Ltd., and Varada Ltd., and he is a director of Allot Communications Ltd. (Nasdaq: ALLT). Mr. Kenneth holds a BA inEconomics and Computer Science from the Bar-Ilan University and an MBA from the Golden Gate University, San Francisco.Mr. Eitan Oppenhaim has been serving as the President and Chief Executive Officer of the Company since July 31, 2013, and was appointed by ourboard of directors to also serve as a director of the Company in October 2019. He has previously served as the Executive Vice President Global BusinessGroup, since November 2010. From 2009 until 2010, Mr. Oppenhaim served as Vice President and Europe General Manager of Alvarion Ltd., a publiccompany traded on Nasdaq. During the years 2007 through 2009, Mr. Oppenhaim served as Vice President of sales and marketing of OptimalTest Ltd.. Prior tothat, from 2002 till 2006, Mr. Oppenhaim served as Vice President – Business Manager of the Flat Panel Displays division of Orbotech Ltd., a public companytraded on Nasdaq. From 2001 till 2002, Mr. Oppenhaim served as Managing Director of Asia Pacific at TTI Telecom International, a leading provider ofassurance, analytics and optimization solutions to communications service providers (CSP) worldwide. Prior to that, from 1994 till 2001, Mr. Oppenhaim heldseveral key executive positions at Comverse Network Systems Ltd., a public company traded on Nasdaq. Mr. Oppenhaim holds a BA in Economics from theHaifa University, Israel and an MBA from Ben-Gurion University, Beer-Sheva, Israel.Mr. Dror David has served as the Chief Financial Officer since November 2005. Mr. David joined Nova in April 1998, as the Company’s Controller,and since then served in various financial and operational positions, including the position of Vice President of Resources, in which he was responsible for thefinance, operations, information systems and human resources functions of the Company. Mr. David was also a leading member in the Company’s initial publicoffering on Nasdaq in 2000, the Company’s private placement in 2007 and the Company's secondary offering in 2010. Prior to joining Nova, Mr. David spentfive years in public accounting with Deloitte Touch in Tel Aviv, specializing in industrial high-tech companies. Mr. David is a Certified Public Accountant inIsrael, holds a B.A. in Accounting and Economics from Bar Ilan University, and an M.B.A. from Derby University of Britain.60Dr. Shay Wolfling joined Nova in 2011, as Chief Technology Officer. Prior to joining Nova, Dr. Wolfling was an R&D manager at KLA-Tencor-Belgium (formerly ICOS Vision Systems, a public traded company acquired by KLA in 2008), where he led multidisciplinary metrology & inspectiondevelopment projects. From 2000 until its technology acquisition by ICOS in 2005, Dr. Wolfling was a founder and Vice President of Research andDevelopment of Nano-Or-Technologies, a start-up company with a proprietary technology for 3D optical measurements. Dr. Wolfling took Nano-Or from theidea stage to initial product sales. Prior to founding Nano-Or, Dr. Wolfling was a project manager in Y-Beam-Technologies, a start-up offering laser-based skintreatments. Dr. Wolfling has several patents under his name in the field of optical measurements. Dr. Wolfling holds a B.Sc. in physics and mathematics fromthe Hebrew University of Jerusalem, Israel, a second degree in physics from Tel-Aviv University, Israel and a Ph.D. in physics from the Hebrew University ofJerusalem, Israel.Mr. Gabriel Waisman joined Nova in 2016 as our Chief Business Officer, responsible for the Company’s customer facing groups, including globalsales, marketing, customer support and applications. Mr. Waisman brings over 21 years of managerial expertise in a global geographically dispersedenvironment, and extensive experience in working with pioneering multidisciplinary technologies, particularly within the electronics and telecom sectors. Priorto joining Nova, Mr. Waisman served as President at Orbotech Pacific (Orbotech LTD, Hong Kong) from August 2013 until April 2016 and Orbotech West(Orbotech Inc., USA) from May 2011 until July 2013, where he was responsible for sales and marketing, finance and operations, and customer support.Previous to this, from June 2003 until May 2011, Mr. Waisman served in various managerial positions at Alvarion Technologies Ltd., starting as StrategicMarketing Director, EMEA, and moving on to Vice President of Strategic Accounts, General Manager of West Europe, followed by Managing Director, Asia-Pacific. Mr. Waisman has also served as EMEA Regional Sales and Marketing Director (Broadband division) at Comverse Ltd. Mr. Waisman holds a B.Sc. inElectronic Engineering from the Technion – Israel Institute of Technology, Haifa, Israel and an MBA in Business Administration from the Tel-Aviv University,Israel.Mr. Adrian S. Wilson Joined Nova in January 2018 as General Manager Material Metrology Division and President of our US subsidiary, NovaMeasuring Instruments, Inc. Mr. Wilson has over 25 years of Semiconductor capital equipment and materials experience. Mr. Wilson joins us from NanometricsInc, where he held the position of Vice President & General Manager of Advanced Imaging and Analytics Business Unit. Prior to Nanometrics Inc, he held theposition of Managing Director of Element Six Technologies Ltd., the non-abrasive arm of the synthetic diamond group of DeBeers, focused on thermalmanagement and optical components for the semiconductor industry. Mr. Wilson has experience in leading both start-ups and divisions within large publicmulti-national companies, including KLA, FormFactor Inc. and Phoenix X-ray Systems & Services Inc., a capital equipment start-up. Mr. Wilson holds abachelor’s degree in Electronics Engineering, post Grad in Marketing Management and a MBA in Technology Management. Mr. Wilson’s accreditationsinclude Fellow of the Chartered Institute of Marketing (UK) and Fellow of the Institute of Directors (UK).61Mr. Gabi Sharon was appointed as Chief Operating Officer in September 2020 and has over 25 years of managerial experience in Semiconductorindustry. Mr. Sharon joined Nova in 1995 and served in several executive positions. Previously, since 2006 Mr. Sharon served as the Nova’s Corporate VicePresident of Operations. In his first role at Nova Mr. Sharon established the Global Customer Support Organization and later he led the developmentdepartment of the Integrated Metrology Product Line, its successful market launch and initial penetration of the Copper CMP market. Prior to joining Nova, Mr.Sharon served as the Marketing Project Manager in ECI Telecom, where he was responsible for implementing telecommunication networks projects in severalcountries across Asia. Mr. Sharon holds a B.Sc. in Computer Engineering from Northeastern University in Boston and M.Sc. in Technology Management fromPolytechnic University in New York.Ms. Sharon Dayan has served as our Chief Human Resources Officer since August 2019. Ms. Dayan joined Nova in January 2018, and until August2019 served as Corporate Vice President Human Resources. Ms. Dayan is an experienced HR executive, bringing diversified experience which covers allhuman resources disciplines, including HR strategy, organizational and people development, M&A and employee experience. Prior to joining Nova Ms. Dayanserved in several senior HR regional and corporate positions within global companies. Her last position before joining Nova, was in the role of SVP at Teva inthe capacity of HR Business Partner for the global corporate functions. Prior to that she served as the Global Head of HR as part of Comverse management,responsible for all HR functions in the company. Before joining Comverse, Ms. Dayan had multiple positions in Amdocs. Ms. Dayan holds BA in SocialScience from Tel-Aviv – Jaffe college, MSc. In Organizational Development from Tel-Aviv University and Group dynamics diploma from Tel Aviv university.Mr. Zohar Gil has served as our Chief Marketing and Business Development Officer since September 2020. Mr. Gil joined Nova in June 2011, anduntil September 2020 served in various key business and marketing positions including Corporate Vice President for Marketing and Business Development,Head of Business Management for Nova’s foundry accounts in the Asia Pacific region and Head of Marketing and Product Management. Currently, as ourChief Marketing and Business Development Officer, Mr. Gil is focusing on the Company’s corporate marketing, strategy and M&A activities. Prior to joiningNova, from 2001 until 2010, Mr. Gil held leading business and marketing positions at Alvarion Ltd., including General Manager for the Carrier Line ofBusiness and Vice President of Product Management. Prior to that, from 1997 until 2001, Mr. Gil served in variety of marketing and product managementpositions in 3Com Corporation. Mr. Gil holds a B.Sc. in Industrial Engineering from Tel-Aviv University, and an Executive MBA from Northwestern and Tel-Aviv Universities from the Kellogg-Recanati Business School of Management.Mr. Effi Aboody has served as our Corporate VP and General Manager Dimensional Metrology Division since September 2019. Mr. Aboody joinedNova in 2016 as Vice President and Head of the Global Applications team, and has over 20 years’ experience in the Semiconductor Industry. He started hiscareer at Intel as an Integration engineer, working in Portland and California R&D centers, in both logic and memory devices. Following that he held severalmanagerial positions at Numonyx in Yield and Integration Departments. After that, he managed the Engineering and Yield Departments at Micron F12. He laterreturned to Intel to manage the F28 Yield Organization, responsible for CPU and SoC outgoing yield and performance. Effi holds an Executive MBA from TelAviv University and a B.Sc. in Materials Engineering from Ben-Gurion University.62Voting AgreementWe are not aware of any voting agreement currently in effect.6.B CompensationThe aggregate compensation expensed, including share-based compensation and other compensation expensed by us, to our executive officers withrespect to the year ended December 31, 2020 (consisting of 9 persons) was $9.15 million. This amount includes approximately $0.7 million set aside or accruedto provide pension, severance, retirement, or similar benefits and amounts expensed by the Company for automobiles made available to its executive officers).Disclosure regarding the compensation of our senior executives on an individual basis will be disclosed in our proxy statement in connection with the2020 annual general meeting of shareholders in accordance with Israeli regulations.Terms of employment of Mr. Eitan Oppenhaim, our President and Chief Executive Officer and a member of the board of directors, as approved by ourshareholders, are as follows:General(i) a monthly base salary of NIS 156,000; (ii) an annual bonus of up to fourteen (14) monthly base salaries (with additional payment of up to 100% ofthe target bonus in the case of over achievement), subject to objectives which are annually predetermined by the board of directors and its committees, inaccordance with our compensation policy; (iii) in connection with termination of employment (other than for cause), a three month advance notice and a sixmonth adjustment period, during which Mr. Oppenhaim will be entitled to all of his compensation elements, and to the continuation of vesting of his options. Inthe event of employment termination during a fiscal year (unless for cause), the bonus shall be prorated (subject to certain adjustments); (iv) customary socialbenefits such as pension fund or management insurance, education fund, vacation pay, sick leave and convalescence pay; (v) subject to required approvalsunder applicable law, a directors and officers insurance, including a “run-off” insurance policy; (vi) non-disclosure, non-compete and ownership of intellectualproperty undertakings; and (vii) monthly travel expenses or a Company car, cellular phone, a land line phone, toll road expenses, a laptop computer and otherexpense reimbursements pursuant to the Company general policies.Equity-Based CompensationSince January 1, 2018 until December 31, 2020, per the approval of the respective annual general meeting of shareholders, Mr. Oppenhaim wasgranted a total of 140,000 options to purchase ordinary shares of the Company with a weighted average exercise price of $26.17 and 38,500 restricted shareunits. The options vest in equal annual installments over a terms of four years commencing one year following the grant date and the restricted share units vestin equal annual installments over a terms of three years commencing one year from the grant date; All options and restricted share units expire seven (7) yearsafter each grant date; can be cancelled in accordance with the terms and conditions of the applicable incentive plan of the Company or the employment terms ofMr. Oppenhaim; and, were made in accordance with and subject to Section 102 of the Income Tax Ordinance of 1961 (New Version) (the “Ordinance”). Inaddition, Mr. Oppenhaim was granted in May 2018, July 2019 and July 2020, 98,500 performance based restricted units that vest over a period of three (3)years, provided that the Company meets or exceeds the performance targets for vesting set by the compensation committee and board of directors of theCompany, unless such restricted share units have been cancelled in accordance with the terms and conditions of the share incentive plan of the Company or theemployment terms of Mr. Oppenhaim. In the event a portion of these restricted share units fails to vest, such portion will be carried forward to the third vestingdate and will vest if the Company’s average annual return on equity based on net income during the previous three (3) years shall be no less than ten percent(10%).63Compensation upon Significant EventUpon the occurrence of a Significant Event, unvested options granted to Mr. Oppenhaim will vest upon the consummation of the Significant Event,and unexercised options may be exercised until the earlier of two years from the consummation of the Significant Event, and termination of the options. Sucharrangements will not apply if Mr. Oppenhaim remains the chief executive officer of our company or the surviving entity, and unvested options are replaced fornew options of the surviving entity as part of the Significant Event with a vesting schedule and terms identical to the replaced options. Further, upon aSignificant Event, Mr. Oppenhaim will be entitled to a special bonus of up to 12 monthly salaries, subject to the approval of the compensation committee andour board of directors and subject to the limitation on a special bonus imposed by our compensation policy. In the event of termination of employment (up to 12months from the Significant Event), Mr. Oppenhaim will be entitled to the retirement terms under his employment agreement, the special bonus describedabove and the payment of the annual bonus in full for the year in which the Significant Event has occurred, subject to the annual bonus plan, on an annual basiscalculation, and subject to the approval of the compensation committee and our board of directors prior to the consummation of the transaction, or therespective body in the new surviving entity following the transaction, as applicable. A “Significant Event” is defined for this purpose as: (1) the sale of all orsubstantially all of our company’s assets; (2) a merger of our company with or into another company or entity after which our shareholders will hold 50% orless of the surviving entity; (3) our company becoming a division or a subsidiary of another company; or (4) the purchase of our company's shares, after whichthe purchaser will hold 50% or more of our company's shares, provided, however, that the purchaser is not one of our institutional investors upon execution ofthe purchase agreement.Compensation upon AcquisitionUpon Acquisition of a company (which is not an affiliate of the company), Mr. Oppenhaim will be entitled to receive a bonus of up to 12 monthlysalaries subject to the approval of the compensation committee and our board of directors and subject to the limitation on a special bonus imposed by ourcompensation policy. An “Acquisition” includes, among others, a merger of our company or a subsidiary of our company with or into another entity, such thatupon consummation of such transaction our shareholders will hold more than 50% of the surviving entity.Directors and Officers Equity Based CompensationAs of February 16, 2021, a total of 515,912 options to purchase our ordinary shares and 272,591 RSU’s were outstanding and held by certain currentexecutive officers and directors (consisting of 15 persons), of which 281,945 options are currently exercisable or exercisable within 60 days of February 16,2021, 27,438 shares are held by trustee due to vested RSUs and no RSU’s will vest within 60 days of February 16, 2021. See “Item 6E. Share Ownership” inthis annual report on Form 20-F.64In accordance with our current equity-based compensation policy, the exercise price of granted options is equal to the closing sale price of theCompany's ordinary shares on Nasdaq on the day of grant.Compensation of DirectorsThe total amount paid or payable to the directors (consisting of six persons, not including Mr. Oppenhaim), for 2020 was $0.37 million.The compensation arrangement of our directors (excluding the chairman of the board of directors and, unless approved otherwise, any other directorwho is also an employee of the Company) includes an annual payment of NIS 92,000 (approximately US$26,730) and a payment per meeting of NIS3,000(approximately US$870) (for each execution of a written consent in lieu of a meeting, an amount of NIS 1,500 and for each meeting that the director attends byteleconference, an amount of NIS 1,800).The compensation arrangement of Dr. Michael Brunstein, the chairman of our board of directors includes a gross annual fee of US$110,000 payablemonthly in NIS.In the 2019 annual general meeting, our shareholders approved an amendment to the equity-based compensation paid to our directors, such that eachmember of our board of directors (excluding the chairman) will be granted an annual award of options to purchase 3,340 ordinary shares and 2,220 restrictedshare units, or, options and restricted share units with an aggregate fair market value of US$100,000 (with the same ratio of options and restricted share units),the lower of the two. Such grant will be made to each director on the date of each annual general meeting at which such director is elected or reelected. Ourchairman will be granted an annual award of options to purchase 15,850 ordinary shares and 10,550 restricted share units, or, options and restricted share unitswith an aggregate fair market value of US$600,000 (with the same ratio of options and restricted share units), the lower of the two. Such grant will be made onthe date of each annual general meeting at which our chairman is elected or reelected. The exercise price of each option will be determined pursuant to ourequity-based compensation policy and the equity awards will vest annually over a period of four years.On June 17, 2019, our shareholders approved our current compensation policy, and on June 25, 2020, our shareholders approved an amendment to thecompensation policy related to directors and officers liability insurance policy premium.The full text of our current compensation policy was included as Appendix A to the proxy statement attached to our report on Form 6-K, furnished tothe Securities and Exchange Commission on May 7, 2019.6.C Board PracticesOur Amended and Restated Articles of Association, as adopted by the Company’s shareholders and recently amended on June 17, 2019, or the Articles,provide that we may have between five and nine directors. Our board of directors currently consists of seven directors, two of which are women.65Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” including companies with shareslisted on the Nasdaq Global Select Market, are required to appoint at least two external directors.Pursuant to regulations promulgated under the Companies Law, companies with shares traded on a U.S. stock exchange, including the Nasdaq GlobalSelect Market, may, subject to certain conditions, “opt out” from the Companies Law requirements to appoint external directors and related Companies Lawrules concerning the composition of the audit committee and compensation committee of the board of directors. In accordance with these regulations, in May2018, we elected to “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the compositionof the audit committee and compensation committee of the board of directors.Under these regulations, the exemptions from such Companies Law requirements will continue to be available to us so long as: (i) we do not have a“controlling shareholder” (as such term is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including the Nasdaq GlobalSelect Market, and (iii) we comply with the director independence requirements, the audit committee and the compensation committee compositionrequirements, under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers.Our board of directors has determined that all of our directors qualify as ‘‘independent directors’’ as defined by The Nasdaq Stock Market Rules.Our Articles provide that directors may be elected at our annual general meeting of shareholders by a vote of the holders of more than 50% of the totalnumber of votes represented at such meeting, not taking into consideration abstention votes. In addition, our board of directors is authorized to appointdirectors, at its discretion, provided that the total number of directors does not exceed the maximum number of directors permitted by the Articles. Our directors(other than the directors who were in the position of external directors until May 2018) serve as such until the next annual general meeting of our shareholders.Effective as of May 2018, and our adoption of the exemption under the Israeli Companies Regulations (Reliefs for Public Companies whose Shares are Listedon a Stock Exchange Outside of Israel), 2000, or the Regulation, our directors in office who were elected and classified as external directors, Ms. Dafna Gruberand Ms. Zehava Simon, are no longer classified as such under the Companies Law. The transition rules set forth under the Regulation provide that suchdirectors have the right to remain in office as our directors at their option after the exemption under the Regulation is adopted until the earlier of such directors’original end of term of office or the second annual meeting of shareholders after the adoption of the exemption under the Regulation, which in the case of Ms.Gruber is until the date of our annual meeting of shareholders to be held in 2020, and in case of Ms. Simon is until earlier of the date of our annual meeting ofshareholders to be held in 2020 and June 2020.According to the Companies Law, the board of directors of a public company must establish the minimum number of board members that are to haveaccounting and financial expertise while considering, inter alia, the nature of the company, its size, the scope and complexity of its operations and the numberof directors stated in the Articles.Our board of directors resolved that the minimum number of board members that need to have accounting and financial expertise is one (1).Our board of directors determined that each of Ms. Dafna Gruber and Ms. Zehava Simon has accounting and financial expertise as described in theregulations promulgated pursuant to the Companies Law, and that, therefore, the requirements of the minimum number of board members that need to haveaccounting and financial expertise, as set by the board of directors, has been met.66Our board of directors has adopted a training program for newly appointed directors. Once appointed and following the completion of their onboardtraining, our directors continue to receive ongoing training as part of our directors training and development efforts.Family RelationshipsThere are no family relationships between any members of our executive management and our directors.Board of Directors’ CommitteesThe Company’s board of directors has appointed the following committees:Audit CommitteeOur Audit Committee is comprised of Dafna Gruber, Zehava Simon and Avi Cohen. The audit committee is responsible to provide oversight of theaccounting and financial reporting process of the Company and the audits of the financial statements of the Company, and assist the Board in its oversight of (i)the integrity of the Company's financial statements and other published financial information, (ii) the Company's compliance with applicable financial andaccounting related standards, rules and regulations, (iii) the selection, engagement and termination, subject to shareholder approval, of the Company'sindependent auditor, (iv) the pre-approval of all audit, audit-related and all permitted non-audit services, if any, by the Company's independent auditor, and thecompensation therefor, (v) the Company's internal controls over financial reporting and (vi) risk assessment and risk management.Under the Companies Law, the audit committee is responsible, among others, for (i) identifying deficiencies in the business management practices ofthe Company, including by consulting with the internal auditor, and recommending remedial actions with respect to such deficiencies; (ii) reviewing andapproving related party transactions, including, among others, determining whether or not such transactions are deemed material actions or extraordinarytransactions; (iii) ensuring that a competitive process is conducted for related party transactions with a controlling shareholder (regardless of whether or notsuch transactions are deemed extraordinary transactions), optionally based on criteria which may be determined by the audit committee annually in advance;(iv) setting forth the approval process for transactions that are 'non-negligible' (i.e., transactions with a controlling shareholder that are classified by the auditcommittee as non-negligible, even though they are not deemed extraordinary transactions), as well as determining which types of transactions would require theapproval of the audit committee, optionally based on criteria which may be determined annually in advance by the audit committee; (v) evaluating theCompany’s internal audit program and the performance of the Company’s internal auditor and the resources at his/her disposal; (vi) reviewing the scope ofwork of the Company’s external auditor and making recommendations regarding his/her salary; and (vii) creating procedures relating to the employees’complaints regarding deficiencies in the administration of the Company as well as adopting against retaliation. The audit committee is also responsible forreviewing and approving any material change or waiver in the Company's Corporate Code of Conduct regarding directors or executive officers, and disclosuresmade in the Company's annual report in such regard. The audit committee operates under a charter dully adopted by the board of directors.67Our board of directors has determined that each member of our audit committee is independent as such term is defined in Rule 10A‑3 under theExchange Act, and that each member of our audit committee satisfies the additional requirements applicable under the Nasdaq rules to members of an auditcommittee.Compensation CommitteeOur Compensation Committee is comprised of Zehava Simon, Dafna Gruber, Raanan Cohen and Miron (Ronnie) Kenneth. The function of thecompensation committee is described in the approved charter of the committee, and includes assisting the board of directors in discharging its responsibilitiesrelating to compensation of the Company’s officers, directors and executives and the overall compensation programs and reviewing and approving, or ifrequired by law, approving and recommending for approval by the board of directors, grants and awards under the Company’s equity incentive plans. Theprimary objective of the committee is to oversee the development and implementation of the compensation policies and plans that are appropriate for theCompany in light of all relevant circumstances, and which provide incentives that fit the Company’s long-term strategic plans and are consistent with theculture of the Company and the overall goal of enhancing shareholder’s value.Our board of directors has determined that each member of our compensation committee is independent under the Nasdaq rules, including theadditional independence requirements applicable to the members of a compensation committee.Under the Companies Law and our compensation committee charter, our compensation committee is responsible, among others, for (i) recommendingto the board of directors regarding its approval of a compensation policy in accordance with the requirements of the Companies Law, and any othercompensation policies, incentive-based compensation plans and equity-based plans; (ii) overseeing the development and implementation of such compensationplans and policies that are appropriate in light of all relevant circumstances and recommending to the board of directors regarding any amendments ormodifications that the compensation committee deems appropriate; (iii) determining whether to approve transactions concerning the terms of engagement andemployment of our officers and directors that require compensation committee approval under the Companies Law or our compensation plans and policies; and(iv) taking any further actions as the compensation committee is required or allowed to under the Companies Law or the compensation plans and policies.Nominating CommitteeOur Nominating Committee is comprised of Ronnie (Miron) Kenneth, Michael Brunstein, and Zehava Simon. The function of the nominatingcommittee is described in the approved charter of the committee, and includes responsibility for identifying individuals qualified to become board members andrecommending that the board of directors consider the director nominees for election at the general meeting of shareholders. The nominating and corporategovernance committee is also responsible for developing and recommending to the board of directors a set of corporate governance guidelines applicable to theCompany, periodically reviewing such guidelines and recommending any changes thereto.Our audit committee also acts as our investment committee.All committees are acting according to written charters that were approved by our board of directors. Additionally, we adopted an internal enforcementplan which was approved by our board of directors. The internal enforcement plan, as part of which we adopted and implementing procedures and policies inorder to comply with the provisions of the Israeli Securities Law, 5728-1968 (the “Israeli Securities Law”), the Companies Law and the applicable guidelinesissued by Israeli Securities Authority. The internal enforcement plan includes, among others, the board committees’ charters, procedures with respect to relatedparty transactions, insider trading, which prohibits hedging activities, reporting and complaints, anti-bribery policy and a code of conduct. Each of ourcommittees have the power to retain, terminate and approve the related fees and other retention terms, as it deems appropriate, outside counsel and other expertsand consultants to assist the committee in connection with its responsibilities without our board of directors’ approval and at the Company's expense.68Approval of Related Party TransactionThe Companies Law requires that office holders of a company, including directors and executive officers, promptly disclose to the board of directorsany personal interest they may have and all related material information known to them about any existing or proposed transaction with such company. Theapproval of the board of directors is required for 'non-extraordinary' transactions between a company and its office holders, or between a company and otherpersons in which an office holder has a personal interest, unless such company's articles of association provide otherwise. Under the Companies Law, a 'non-extraordinary' transaction between a company or between the company and a third party in which an office holder of a company has a personal interest, willrequire the approval of the board of directors or a committee authorized by the board of directors, unless such company's articles of association provideotherwise. Our Articles do not provide otherwise, and therefore such transaction requires the approval of our board of directors. If a transaction is an“extraordinary transaction”, it is subject to the approval of the audit committee prior to its approval by the board of directors. For information regarding thenecessary approvals under the Companies Law for transactions with office holders and directors regarding their terms of engagement with the company, see “—Compensation of Officers and Directors” in this Item below.In addition, an extraordinary transaction between a public company and a controlling shareholder (i.e. a shareholder who has the ability to direct theactivities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights,but excluding a shareholder whose power derives solely from its position on the board of directors or any other position with the company), or in which acontrolling shareholder has a personal interest, including a private placement in which the controlling shareholder has a personal interest, a transaction betweena public company and a controlling shareholder, the controlling shareholders' relative, or entities under its control, directly or indirectly, with respect to servicesto be provided to the public company, and a transaction concerning the terms of compensation of the controlling shareholder or the controlling shareholder’srelative, who is an office holder or an employee, requires the approval of the audit committee or, in some cases, the compensation committee (see "—Compensation of Officers and Directors" in this Item below), the board of directors and a majority of the shares voted by the shareholders of the companyparticipating and voting on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements: (i) themajority must include at least a majority of the shares of the voting shareholders who have no personal interest in the transaction (in counting the total votes ofsuch shareholders, abstentions are not taken into account); or (ii) the total of opposition votes among the shareholders who have no personal interest in thetransaction may not exceed 2% of the aggregate voting rights in the company. Any such transaction the term of which is more than three years, must beapproved in the same manner every three years, unless with respect to certain transactions as permitted by the Companies Law, the audit committee hasdetermined that longer term is reasonable under the circumstances.69According to the Companies Law, if an extraordinary transaction is discussed by the board of directors or the audit committee, directors and officeholders that have personal interest in the proposed transaction, may not participate in the discussion or vote. However, if the majority of the members of theaudit committee or the board of directors (as applicable) have personal interest in the proposed transaction, then all directors (including those with personalinterest) may participate in the discussion and vote, provided that in the event the majority of the members of the board of directors have personal interest in thetransaction, said transaction will also be subject to the approval of the Company's shareholders.Compensation of Officers and DirectorsUnder the Companies Law, Israeli public companies are required to establish a compensation committee and adopt a policy regarding thecompensation and terms of employment of their directors and officers. For information on the composition, roles and objectives of the compensation committeepursuant to the Companies Law and our compensation committee charter, see above “—Board of Directors’ Committees — Compensation Committee" in thisannual report on Form 20-F.Pursuant to the Companies Law, the compensation policy must be approved by the company's board of directors after reviewing the recommendationsof the compensation committee. The compensation policy also requires the approval of the general meeting of the shareholders, which approval must satisfyone of the following (the "Majority Requirement"): (i) the majority should include at least a majority of the shares of the voting shareholders who are non-controlling shareholders or do not have a personal interest in the approval of the compensation policy (in counting the total votes of such shareholders,abstentions are not be taken into account) or (ii) the total number of votes against the proposal among the shareholders mentioned in paragraph (i) does notexceed two percent of the aggregate voting power in the company. Under certain circumstances and subject to certain exceptions, the board of directors mayapprove the compensation policy despite the objection of the shareholders, provided that the compensation committee and the board of directors determines thatit is for the benefit of the company, following an additional discussion and based on detailed arguments.The Companies Law provides that the compensation policy must be re-approved (and re-considered) every three years, in the manner described above.Moreover, the board of directors is responsible for reviewing from time to time the compensation policy and deciding whether or not there are anycircumstances that require an adjustment to the company's compensation policy. When approving the compensation policy, the relevant organs must take intoconsideration the goals and objectives listed in the Companies Law, and include reference to specific issues listed in the Companies Law. Such issues include,among others (the “Compensation Policy Mandatory Criteria”): (i) the relevant person’s education, qualifications, professional experience and achievements;(ii) such person's position within the company, the scope of his responsibilities and previous compensation arrangements with the company; (iii) theproportionality of the employer cost of such person in relation to the employer cost of other employees of the company, and in particular, the average andmedian pay of other employees in the company, including contract workers, and the impact of the differences between such person's compensation and theother employees' compensation on the labor relations in the company; (iv) the authority, at the board of director's sole discretion, to lower any variablecompensation components or set a maximum limit (cap) on the actual value of the non-cash variable components, when paid; and (v) in the event that the termsof engagement include any termination payments - the term of employment of the departing person, the company’s performance during that term, and thedeparting person’s contribution to the performance of the company.70In addition, the Companies Law provides that the following matters must be included in the compensation policy (the "Compensation PolicyMandatory Provisions"): (i) the award of variable components must be based on long term and measurable performance criteria (other than non-materialvariable components, which may be based on non-measurable criteria taking into account the relevant person's contribution to the performance of thecompany); (ii) the company must set a ratio between fixed and variable pay, set a cap on the payment of any cash variable compensation components as of thepayment of such components, and set a cap on the maximum cash value all non-cash variable components as of their grant date; (iii) the compensation policymust include a provision requiring the relevant person to return to the company any compensation that was awarded on the basis of financial figures that weresubsequently restated; (iv) equity based variable compensation components should have an appropriate minimum vesting periods, which should be linked tolong term performance objectives; and (v) the company must set a clear limit on termination payments.Pursuant to the Companies Law, any transaction with an office holder (except directors and the chief executive officer of the company) with respect tosuch office holder's compensation arrangements and terms of engagement, requires the approval of the compensation committee and the board of directors.Such transaction must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board ofdirectors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the followingconditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensationcommittee (also see above "—Board of Directors' Committees — Compensation Committee" in this annual report on Form 20-F) and after taking intoconsideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) thecompany's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. Notwithstanding theabove, the compensation committee and the board of directors may, under special circumstances, approve such transaction even if the shareholders' meetingobjected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve itdespite the shareholder's objection, based on detailed arguments, and (ii) the company is not a 'Public Pyramid Held Company'. For the purpose hereof, a"Public Pyramid Held Company" is a public company that is controlled by another public company (including companies that issued only debentures to thepublic), which is also controlled by another public company (including companies that issued only debentures to the public) that has a controlling shareholder.Transactions between public companies (including companies that have issued only debentures to the public) and their chief executive officer, withrespect to his or her compensation arrangement and terms of engagement, require the approval of the compensation committee, the board of directors and theshareholder's meeting, provided that the approval of the shareholders' meeting must satisfy the Majority Requirement. Notwithstanding the above, thecompensation committee and the board of directors may, under special circumstances, approve such transaction with the chief executive officer even if theshareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions anddecided to approve it despite the shareholder's objection, based on detailed arguments, and (ii) the company is not a Public Pyramid Held Company. Suchtransaction with the chief executive officer must be consistent with the provisions of the company's compensation policy, provided that the compensationcommittee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensationpolicy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles andobjectives of the compensation committee (see above —“Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F) andafter taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions;and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. Inaddition, the compensation committee may determine that such transaction with the CEO does not have to be approved by the shareholders of the company,provided that: (i) the chief executive officer is independent based on criteria set forth in the Companies Law; (ii) the compensation committee determined,based on detailed arguments, that bringing the transaction to the approval of the shareholders may compromise the chances of entering into the transaction; and(iii) the terms of the transaction are consistent with the provisions of the company's compensation policy. Under the Companies Law, non-material amendmentsof transactions relating to the compensation arrangement or terms of engagement of office holders (including the chief executive officer), require only theapproval of the compensation committee.With respect to transactions relating to the compensation arrangement and terms of engagements of directors in public companies (includingcompanies that have issued only debentures to the public), the Companies Law provides that such transaction is subject to the approval of the compensationcommittee, the board of directors and the shareholders' meeting. Such transaction must be consistent with the provisions of the company's compensation policy,provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance withthe company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed thetransaction in light of the roles and objectives of the compensation committee (see above "—Board Practices –Board of Directors' Committees – CompensationCommittee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in suchtransaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companiesthe approval must satisfy the Majority Requirement.Pursuant to the Companies Law, a compensation policy must be re-approved (and re-considered) at least once in every three years. The currentcompensation policy was approved by our shareholders in June 2019, and on June 25, 2020, our shareholders approved an amendment to the compensationpolicy with respect to the premium payable in connection with our directors and officers liability insurance policy.71Internal AuditorUnder the Companies Law, the board of directors must also appoint an internal auditor nominated by the audit committee. Our internal auditor is Ms.Dana Gottesman-Erlich, CPA (Isr.) of BDO Ziv Haft, an independent registered accounting firm which is a part of the BDO international accounting firm. Therole of the internal auditor is to examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may not be aninterested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firmor its representative. The Companies Law defines an interested party as a holder of 5% or more of the shares or voting rights of a company, any person or entitythat has the right to nominate or appoint at least one director or the general manager of the company or any person who serves as a director or as the generalmanager of a company. Our internal auditor is working based on a risk survey and audit plan, which is determined by our audit committee and approved by ourboard of directors.6.D EmployeesSet forth below is a chart showing the number of people we employed at the times indicated:As of December 31,2018(*)2019(*)2020(*) Total Personnel662646713 Located in Israel373349385Located abroad289297328 In operations100108129In research and development275251300In global business242247263In general and administration454049_______________________(*) The numbers of employees set forth in this table do not include contractors and an insignificant number of temporary employees retained by the Companyfrom time to time.In the high-tech industry in general and specifically in the semiconductors industry, there is intense competition for high-skilled employees. Novabelieves that the company’s future success will depend, by a large part, on our continued ability to attract, hire and retain qualified and highly motivatedemployees in every role and seniority level.We were a member of the Industrialists Association in Israel, an employer’s union until December 31, 2006. Under applicable Israeli law, we and ouremployees are subject to protective labor provisions such as restrictions on working hours, minimum wages, paid vacation, sick pay, severance pay and advancenotice of termination of employment as well as equal opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Economy and Industrymake certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters such as cost of living adjustments to salaries,length of working hours and week, recuperation and travel expenses. In Israel, we are subject to the instructions of the Extension Order in the Industrial Fieldfor Extensive Pension Insurance 2006 according to the Israeli Collective Bargaining Agreements Law, 1957 (the “Extension Order”). The Extension Orderdetermines the pension terms of the employees which fall under its criteria.726.E Share OwnershipBased on information provided to us, our 15 directors and officers listed in Item 6A above, have had, as a group, sole voting and investment power for309,383 shares beneficially owned by them as of February 16, 2021 (representing 1.1% of the 28,196,562 issued and outstanding ordinary shares of ourcompany as of such date). Such number includes 281,945 shares subject to options that are immediately exercisable or exercisable within 60 days of February16, 2021 (with expiration dates ranging between 2021 and 2027; exercise prices ($/share) ranging between 11.28 and 48.20), 27,438 shares held by the trusteedue to vested RSUs, and no RSUs to be vested within 60 days as of February 16, 2021. Each of such directors and executive officers beneficially owned lessthan 1% of our company’s shares as of such date.Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercisessole or shared voting or investment power. Ordinary shares that are subject to warrants or options that are presently exercisable or exercisable within 60 days ofthe date of February 16, 2021 are deemed to be outstanding and beneficially owned by the person holding the options for the purpose of computing thepercentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.Employee Benefit PlansThe share option plans under which we have outstanding equity grants, are described below:2007 Incentive Plan (which was active until October 2017) - As of December 31, 2020, options to purchase 4,304,112 ordinary shares at an exerciseprices which range from $0.43 to $24.96, the fair market value of our shares on the dates of grant, were granted under this plan of which, as of December 31,2020, 2,789,710 options were exercised, 304,598 options were outstanding and exercisable, 1,176,136 options had been cancelled and 33,668 were outstandingand unvested. As of December 31, 2020, 834,142 RSU’s had been granted, of which 722,934 had vested, 105,363 had been cancelled and 5,845 RSU's wereoutstanding. Following adoption of 2017 share incentive plan, as detailed herein, we have ceased granting equity under the 2007 incentive plan.2017 Share Incentive Plan - The maximum number of ordinary shares to be issued under the plan, which was adopted by our board of directors onAugust 1, 2017, is 2,500,000, subject to future increases or decreases by the Company. As of December 31, 2020, options to purchase 626,262 ordinary sharesat an exercise prices which range from $22.56 to $60.91, the closing price of the Company's ordinary shares on Nasdaq on the day of grant, were granted underthis plan of which, as of December 31, 2020, 48,206 options were exercised, 157,497 options were outstanding and exercisable, 119,043 options had beencancelled and 301,516 were outstanding and unvested. As of December 31, 2020, 651,882 RSU’s had been granted, of which 150,276 RSU’s had vested,38,890 had been cancelled and 462,716 RSU's were outstanding.On June 17, 2019, our shareholders (following an approval by our compensation committee and board of directors), approved the Company'scompensation policy, which includes, among others, provisions relating to equity-based compensation for Nova's executive officers.The compensation policy provides, among others, that: (i) such equity based compensation is intended to be in a form of share options and/or otherequity based awards, such as RSUs, in accordance with the Company's equity incentive plan in place as may be updated from time to time; (ii) all equity-basedincentives granted to executive officers will be subject to vesting periods in order to promote long-term retention of the awarded executive officers. Unlessdetermined otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to executive officers (otherthan directors) will vest gradually over a period of between three to five years; and (iii) all other terms of the equity awards will be in accordance with Nova'sincentive plans and other related practices and policies. The board of directors may, following approval by the compensation committee, extend the period oftime for which an award is to remain exercisable and make provisions with respect to the acceleration of the vesting period of any executive officer's awards,including, without limitation, in connection with a corporate transaction involving a change of control, subject to any additional approval as may be required bythe Companies Law. The compensation policy also provides that the equity-based compensation will be granted from time to time and be individuallydetermined and awarded according to the performance, educational background, prior business experience, qualifications, role and the personal responsibilitiesof the executive officer. The fair market value of the equity-based compensation for the executive officers will be determined according to acceptable valuationpractices at the time of grant. Our compensation policy provides that equity-based compensation awarded to employees, executive officers or directors shall notbe, in the aggregate, in excess of 10% of our share capital on a fully diluted basis at the date of the grant.73Our equity-based compensation policy, which was initially adopted in February 2007 and was most recently amended in December 2018, provides,among others, that the exercise price for each option will be equal to the closing sale price of the Company's ordinary shares on Nasdaq on the day of grant.For additional information regarding our employees’ incentive plans, see Note 9 of our consolidated financial statements, contained elsewhere in thisreport.Item 7. Major Shareholder and Related Party TransactionsA. Major ShareholdersThe following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of the dates indicated belowfor each person who we know beneficially owns five percent or more of the outstanding ordinary shares.Beneficial ownership of shares is determined under rules of the SEC and generally includes any shares over which a person exercises sole or sharedvoting or investment power. Applicable percentages are based on 28,196,562 ordinary shares outstanding as of February 16, 2021.NameNumber ofOrdinarySharesBeneficiallyOwnedPercentage ofOrdinarySharesBeneficiallyOwnedHarel Insurance Investments & Financial Services Ltd. (1)2,190,9777.77%Wasatch Advisors Inc. (2)2,180,0407.73%Menora Mivtachim Holdings Ltd. (3)2,108,8807.48%Migdal Insurance & Financial Holdings Ltd. (4)1,934,6096.86%Renaissance Technologies LLC. (5)1,688,8445.99%Adage Capital Partners GP, L.L.C. (6)1,531,8005.43%74(1)The information is based upon Amendment no. 7 to Schedule 13G filed with the SEC by Harel Insurance Investments & Financial Services Ltd. onJanuary 27, 2021 regarding holdings as of December 31, 2020.(2)The information is based upon Schedule 13G filed with the SEC by Wasatch Advisors Inc. on February 11, 2021 regarding holdings as of December31, 2020.(3)The information is based upon Amendment no. 4 to Schedule 13G filed with the SEC by Menora Mivtachim Holdings Ltd., Menora MivtachimPensions and Gemel Ltd., Menora Mivtahim Insurance Ltd., Menora Mivtachim Vehistadrut Hamehandesim Nihul Kupot Gemel Ltd. and Shomera InsuranceCompany Ltd. on February 11, 2021 regarding holdings as of December 31, 2020.(4)The information is based upon Schedule 13G filed with the SEC by Migdal Insurance & Financial Holdings Ltd. on February 16, 2021 regardingholdings as of December 31, 2020.(5)The information is based upon Amendment no. 2 to Schedule 13G filed with the SEC by Adage Capital Partners, L.P., Adage Capital Partners GP,L.L.C., Adage Capital Advisors, L.L.C., Robert Atchinson and Phillip Gross on February 11, 2021 regarding holdings as of December 31, 2020(6)The information is based upon Amendment no. 7 to Schedule 13G filed with the SEC by Renaissance Technologies LLC and Renaissance andRenaissance Technologies Holdings Corporration on February 11, 2021 regarding holdings as of December 31, 2020.All the shareholders of the Company have the same voting rights.To our knowledge, the significant changes in the percentage of ownership held by our major shareholders during the past three years have been: (i) theincrease in the percentage of ownership by Clal Insurance Enterprises Holdings Ltd. above 5% in 2018 and decrease below 5% in 2019; (ii) the increase in thepercentage of ownership of Psagot Investment House Ltd. above 5% in 2018, and the decrease in the percentage of ownership below 5% in 2019; (iii) thedecrease in the percentage of ownership of Yelin Lapidot Holdings Management Ltd., Dov Yelin, Yair Lapidot below 5% in 2018 (iv) the decrease in thepercentage of ownership of Migdal Insurance & Financial Holdings below 5% in 2018 and the increase in the percentage of ownership above 5% in 2020; (v)the increase in the percentage of ownership by The Phoenix Holdings Ltd., Itshak Sharon (Tshuva), and Delek Group Ltd above 5% in 2018 and the decreasebelow 5% in 2020; and (vi) the increase in the percentage of ownership by Adage Capital Partners LP, Adage Capital Partners GP, L.L.C and Adage CapitalAdvisors L.L.C above 5% in 2019; and (vii) the increase in the percentage of ownership by Wasatch Advisors Inc. above 5% in 2020.As of February 16, 2021, our ordinary shares were held by 12 registered holders (not including CEDE & Co.). Based on the information provided to usby our transfer agent, as of February 16, 2021, 10 registered holders were U.S. domicile holders and held approximately 0.02% of our outstanding ordinaryshares.Control of RegistrantTo the Company’s knowledge, it is not owned or controlled by a foreign government. Except for the shareholders identified above owning more thanfive percent of the Company’s ordinary shares, the Company has no knowledge of any corporation or other natural or legal person owning a controlling interestin the Company.75B. Related Party TransactionsIn June 2020, we obtained directors’ and officers’ liability insurance for our officers and directors with coverage in an aggregate amount of$30,000,000 (including $5,000,000 Side A DIC). This directors’ and officers’ liability insurance was presented and approved by our compensation committee inaccordance with the framework under our compensation policy.Our compensation policy authorizes the Company, as long as the compensation policy is in effect, to extend and/or renew the directors’ and officers’liability insurance or enter into a new insurance policy, provided however, that the insurance transaction complies with the following conditions: (i) the annualpremium to be paid by us will not exceed 9% of the aggregate coverage of the insurance policy; (ii) the limit of liability of the insurer will not exceed thegreater of $50 million or 30% of our shareholders equity based on our most recent financial statements at the time of approval by the compensation committee;and (iii) the insurance policy, as well as the limit of liability and the premium for each extension or renewal will be approved by the compensation committee(and, if required by law, by the board of directors) which will determine that the sums are reasonable considering our exposures, the scope of coverage and themarket conditions and that the insurance policy reflects the current market conditions, and it will not materially affect our profitability, assets or liabilities.Further, upon circumstances to be approved by the compensation committee (and, if required by law, by the board of directors), we will be entitled toenter into a "run off" insurance policy of up to seven years, with the same insurer or any other insurance, as follows: (i) the limit of liability of the insurer willnot exceed the greater of $50 million or 30% of our shareholders equity based on our most recent financial statements at the time of approval by thecompensation committee; (ii) the annual premium will not exceed 300% of the last paid annual premium; and (iii) the insurance policy, as well as the limit ofliability and the premium for each extension or renewal will be approved by the compensation committee (and, if required by law, by the board of directors)which shall determine that the sums are reasonable considering our exposures covered under such policy, the scope of cover and the market conditions, and thatthe insurance policy reflects the current market conditions and that it will not materially affect our profitability, assets or liabilities.We may also extend the insurance policy in place to include cover for liability pursuant to a future public offering of securities as follows: (i) theadditional premium for such extension of liability coverage will not exceed 50% of the last paid annual premium; and (ii) the insurance policy as well as theadditional premium will be approved by the compensation committee (and if required by law, by the board of directors) which will determine that the sums arereasonable considering the exposures pursuant to such public offering of securities, the scope of cover and the market conditions and that the insurance policyreflects the current market conditions, and it does not materially affect our profitability, assets or liabilities.In addition, we undertook to indemnify our officers and directors up to an aggregate amount of 25% of the Company’s shareholders’ equity, accordingto the most recent consolidated financial statement prior to the date of indemnification payment. Pursuant to our amended and restated compensation policy, wemay indemnify our directors and officers to the fullest extent permitted by applicable law, for any liability and expense that may be imposed on the director orthe officer, as provided in the indemnity agreement between us and such individuals, all subject to applicable law and our articles of association. Our amendedand restated compensation policy also provides that we may exempt our directors and officers in advance for all or any of their liability for damage inconsequence of a breach of the duty of care vis-a-vis our company, to the fullest extent permitted by applicable law.76For information relating to options granted to officers and directors, see “Item 6E. Share Ownership” in this annual report on Form 20-F. Forinformation regarding our compensation policy and compensation arrangements with our directors and executive officers (including our chairman and chiefexecutive officer), please refer to “Item 6B. Compensation” in this annual report on Form 20-F.7.C Interest of Experts and CounselNot applicable.Item 8. Financial Information8.AConsolidated Statements and Other Financial InformationSee “Item 17. Financial Statements” in this annual report on Form 20-F.Legal ProceedingsFrom time to time, we or our subsidiaries may be a party to legal proceedings and claims in the ordinary course of business. While the outcome ofthese matters cannot be predicted with certainty, we do not believe they will have a material effect on our consolidated financial position, results of operations,or cash flows.We are currently not involved in any significant legal proceedings.Dividend PoliciesWe anticipate that, for the foreseeable future, we will retain any earnings to support operations and to finance the growth and development of ourbusiness. Therefore, we do not expect to pay cash dividends for at least the next several years.The distribution of dividends may be limited by the Companies Law, which permits the distribution of dividends only out of retained earnings orearnings derived over the two most recent fiscal years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will preventa company from satisfying its existing and foreseeable obligations as they become due. Our Amended and Restated Articles of Association provide thatdividends will be paid at the discretion of, and upon resolution by, our board of directors.In addition, distribution of dividends may be subject to certain tax implication. For additional information regarding tax implication of dividends'distribution, see “Item 10E. Taxation – Israeli Taxation” in this annual report on Form 20-F.Export SalesSubstantially all of our products are sold to customers located outside Israel and the United States.8.BSignificant ChangesNot applicable.77Item 9. The Offer and Listing9.AOffer and Listing DetailsOur ordinary shares began trading on Nasdaq on April 11, 2000 under the symbol “NVMI”. Our ordinary shares were registered for trading on the TelAviv Stock Exchange Ltd. in 2002 under the symbol “הבונ”.9.BPlan of DistributionNot applicable.9.CMarketsOur ordinary shares are quoted on the Nasdaq Global Select Market under the symbol “NVMI” and on the Tel Aviv Stock Exchange Ltd.9.DSelling ShareholdersNot applicable.9.EDilutionNot applicable.9.FExpenses on the IssueNot applicable.Item 10. Additional Information10.AShare CapitalNot applicable.10.BMemorandum and Articles of AssociationA copy of our amended and restated articles of association is attached as Exhibit 1.1 to this annual report on Form 20-F. The information called for bythis Item is set forth in Exhibit 2.1 to this annual report on Form 20-F and is incorporated by reference into this annual report on Form 20-F.7810.CMaterial ContractsIsraeli Lease AgreementOn May 3, 2018, we entered into a lease agreement, or the Lease Agreement, with Bayside Land Corporation Ltd., or Bayside.Pursuant to the Lease Agreement, we are currently leasing from Bayside a total of approximate 10,000 square meters, or the Initial Space, in a newbuilding at the Science Park in Rehovot.The lease period for the Initial Space extends until 2029, or the Initial Lease Period. We have the option to extend the lease period by two periods offive years each, subject to customary conditions.The Lease agreement also includes a leasing of an additional space of approximately 2,000 square meters, or the Additional Space, which is expectedto begin in 2021, and will extend through the same lease periods as the Initial Space.These leases cannot be terminated by us during the Initial Lease Period. Under certain circumstances, Bayside may terminate the Agreement in theevent of change of control in the Company.The average monthly lease, parking and management costs for the Initial Space in the Initial Lease Period are approximately NIS 700,000 per month.During each of the additional lease option periods, the monthly lease and parking payments for the Initial Space will be increased by 2.5%. The monthly lease,parking and management costs for the Additional Space are expected to be approximately NIS 180,000 per month. The monthly lease, parking and managementcosts are linked to the Israeli consumer price index.On February 3, 2019, we entered into a construction contractor agreement with A. Weiss Construction and Supervision Ltd. in order to set the termsunder which the contractor will perform the main construction and adjustment works in connection our new Israeli Lease Agreement. The services include,among others, adjustments of electro-mechanical systems as well as works related to electricity, plumbing, air conditioning, flooring, cladding and carpentry, allin accordance with the specifications, plans and the quantities schedule (Ktav-Kamuyot) enclosed to the agreement. Following our transition to the newfacilities, most of the obligations related to this agreement have already been executed and paid for. The agreement may be terminated by us for convenience,by providing to the Contractor a seven-day prior written notice.For a description of our issuance of convertible notes, see Note 16 to our consolidated financial statements included within this annual report.10.DExchange ControlsIsraeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.Dividends, if any, paid to holders of our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as theproceeds of any sale in Israel of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be convertedinto freely repatriable dollars at the rate of exchange prevailing at the time of conversion.7910.ETaxationIsraeli TaxationThe following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section alsocontains a discussion of some Israeli tax consequences to persons owning our ordinary shares. This summary does not discuss all the aspects of Israeli tax lawthat 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 treatmentunder Israeli law. Examples of this kind of investor include traders in securities who are subject to special tax regimes not covered in this discussion. Someparts of this discussion are based on a new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not beconstrued as legal or professional tax advice and does not cover all possible tax considerations.SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OFTHE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANYFOREIGN, STATE OR LOCAL TAXES.General Corporate Tax Structure in IsraelIsraeli companies are generally subject to corporate tax on their taxable income at the rate of 23% for the 2018 tax year and thereafter. However, theeffective tax rate payable by a company that derives income from an Approved Enterprise, a Beneficiary Enterprise, a Preferred Enterprise, a Special PreferredEnterprise, a Preferred Technology Enterprise or Special Preferred Technology Enterprise (as discussed below) may be lower. Capital gains derived by anIsraeli company are generally subject to the prevailing regular corporate tax rate.Income Tax Regulations (Rules on Bookkeeping by Foreign Invested Companies and Certain Partnerships and Determination of their TaxableIncome), 1986As a “foreign invested company” (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's management haselected to apply Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and DeterminingTheir Taxable Income) - 1986. Accordingly, its taxable income or loss is calculated in US Dollars.Tax Benefits under the Law for the Encouragement of Capital Investments, 1959Tax benefits prior to the 2005 AmendmentThe Law for the Encouragement of Capital Investments, 1959, generally referred to as the “Investments Law”, provides that a capital investment ineligible facilities may, upon application to the Israeli Authority for Investments and Development of the Industry and Economy (the “Investment Center”), begranted the status of an Approved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated bothby its financial scope, including sources or funds, and by its physical characteristics or the facility or other assets, e.g., the equipment to be purchased andutilized pursuant to the program.80A company owning an Approved Enterprise is eligible for a combination of grants and tax benefits (the “Grant Track”). The tax benefits under theGrant Track include, among others, accelerated depreciation and amortization for tax purposes. The benefits period is ordinarily seven years commencing withthe year in which the Approved Enterprise first generates taxable income. The benefits period is limited to 12 years from the earlier of the commencement ofproduction by the Approved Enterprise or 14 years from the date of approval of the Approved Enterprise.A company owning an Approved Enterprise may elect to forego its entitlements to grants and tax benefits under the Grant Track and apply foralternative package of tax benefits for a benefit period of between seven and ten years (the “Alternative Track”). Under the Alternative Track, a company’sundistributed income derived from the Approved Enterprise will be exempt from corporate tax for a period of between two and ten years, starting from the firstyear the company derives taxable income under the Approved Enterprise program. The length this exemption will depend on the geographic location of theApproved Enterprise within Israel. After the exemption period lapses, the company subject to tax at a reduced corporate tax rate between of 10% to 25%depending on the level of foreign investment in the company in each year for the remainder of the benefits period.We elected to be taxed under the Alternative Track. A company that has elected the Alternative Track and subsequently pays a dividend out of incomederived from the Approved Enterprise during the tax exemption period will be subject to corporate tax on the amount that is determined by the distributedamount (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) with the effective corporate tax rate whichwould have been applied had the company not elected the Alternative Track, which is at ranged between 10%-25%, depending on the level of foreigninvestment in the company in each year.Under the Alternative Track, dividends paid by a company are considered to be attributable to income received from the entire company and thecompany’s effective tax rate is the result of a weighted average of the various applicable tax rates, excluding any tax-exempt income. Under the InvestmentsLaw, a company that has elected the Alternative Track is not obliged to distribute retained profits, and may generally decide from which year’s profits to declaredividends.We currently intend to reinvest any income derived from our Approved Enterprise program and not to distribute such income as a dividend. See alsoNote 11B to our consolidated financial statements contained elsewhere in this report.Tax benefits under the 2005 AmendmentAn amendment to the Investments Law, which is effective as of April 1, 2005, has changed certain provisions of the Investments Law, or the 2005Amendment. An eligible investment program under the 2005 Amendment qualifies for benefits as a “Beneficiary Enterprise” (rather than as an ApprovedEnterprise, which status is still applicable for investment programs approved prior to April 1, 2005 and/or investment programs under the Grant Track).According to the 2005 Amendment, only Approved Enterprises receiving cash grants require the prior approval of the Investment Center. As a result, acompany is no longer required to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under thealternative benefits program. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilitiesmeet the criteria for tax benefits set forth in the 2005 Amendment. A company that has a Beneficiary Enterprise may, at its discretion, approach the ITA for apre-ruling confirming that it is in compliance with the provisions of the Investment Law.81The duration of the tax benefits described herein is limited to the earlier of seven (7) or ten (10) years (depending on the geographic location of theBeneficiary Enterprise within Israel) from the Commencement Year (as described below) or 12 or 14 years from the first day of the Year of Election (asdescribed below), depending on the location of the company within Israel. Commencement Year is defined as the later of the first tax year in which a companyhad derived liable income for tax purposes from the Beneficiary Enterprise, or the Year of Election, which is defined as the year in which a company requestedto have the tax benefits apply to the Beneficiary Enterprise. The tax benefits granted to a Beneficiary Enterprise are determined, depending on the geographiclocation of the Beneficiary Enterprise within Israel.Similar to the currently available Alternative Track, exemption from corporate tax may be available on undistributed income for a period of two to tenyears, depending on the geographic location of the Beneficiary Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of thebenefits period, depending on the level of foreign investment in each year. If the company pays a dividend out of income derived from the BeneficiaryEnterprise during the benefits period and such dividend is actually paid at any time up to 12 years thereafter, except with respect to a foreign investmentcompany (an “FIC”), in which case the 12-year limit does not apply, such income will be subject to withholding tax at the rate of 15% (or a lower rate under atax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA, allowing for a reduced tax rate). A Company that pays dividend outof income derived from the Beneficiary Enterprise during the tax exemption period will be subject to tax with respect to the amount distributed (grossed up toreflect such pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise beenapplicable.The benefits available to a Beneficiary Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and itsregulations. 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 priceindex and interest, or other monetary penalty.As a result of the 2005 Amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxesupon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income.We had three Approved Enterprise plans under the Investments Law, which entitled us to certain tax benefits. In addition, in 2011, based on Companyinvestments in property and equipment in the years 2008 and 2009, the Company submitted the applicable form as a Benefited Enterprise in accordance withthe 2005 Amendment to the Investments Law. The year of election was 2010.Tax benefits under the 2011 AmendmentOn December 29, 2010, the Israeli Parliament approved the 2011 amendment to the Investments Law (the “2011 Amendment”). The 2011 Amendmentsignificantly revised the tax incentive regime in Israel, commencing on January 1, 2011.The 2011 Amendment introduced a new status of “Preferred Enterprise”, replacing the existed status of “Beneficiary Enterprise” and introduced newbenefits for income generated by a “Preferred Company” through its Preferred Enterprise. A Preferred Company is an industrial company that meets certainconditions (including a minimum threshold of 25% export). However, under the 2011 Amendment the requirement for a minimum investment in productiveassets in order to be eligible for the benefits granted under the Investments Law as with respect to “Beneficiary Enterprise” was cancelled.82A Preferred Company is entitled to a reduced flat tax rate with respect to its preferred income attributed to the Preferred Enterprise, at the followingrates:Tax YearDevelopment Region “A”Other Areas within Israel2011-201210%15%20137%12.5%2014-20169%16%2017 onwards7.5%16%* In December 2016, the Israeli Parliament (the Knesset) approved an amendment to the Investments Law pursuant to which the tax rate applicable toPreferred Enterprises in Development Region "A" would be reduced to 7.5% as of January 1, 2017.The classification of income generated from the provision of usage rights in know-how or software that were developed in the Preferred Enterprise, aswell as royalty income received with respect to such usage, as preferred income is subject to the issuance of a pre-ruling from the ITA stipulates that suchincome is associated with the productive activity of the Preferred Enterprise in Israel.In addition, the 2011 Amendment introduced a new status of “Special Preferred Company” which is an Industrial company meeting, in addition to theconditions prescribed for “Preferred Company” certain additional conditions (including that the total Preferred Enterprise income is at least NIS 1 1 billion in2017 and thereafter). The tax rate applicable for a period of 10 years to income generated by such an enterprise will be reduced to 5%, if located inDevelopment Region “A”, or to 8%, if located in other area within the State of Israel.Dividends distributed from preferred income which is attributed to a “Preferred Enterprise” or a “Special Preferred Enterprise” will be subject towithholding tax at source at the following rates: (i) Israeli resident corporations – 0% (although, if such dividends are subsequently distributed to individuals ora 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), (ii) Israeli residentindividuals – 20% (iii) non-Israeli residents - 20% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate fromthe ITA allowing for a reduced tax rate).The 2011 Amendment also revised the Grant Track to apply only to the approved programs located in Development Region “A” and shall provide notonly cash grants (as prior to the 2011 Amendment) but also the granting of loans. The rates for grants and loans shall not be fixed but up to 20% of the amountof the approved investment. In addition, a company owning a Preferred Enterprise under the Grant Track may be entitled also to the tax benefits which areprescribed for a Preferred Enterprise.The provisions of the 2011 Amendment do not apply to existing “Beneficiary Enterprises” or “Approved Enterprises”, which will continue to beentitled to the tax benefits under the Investments Law, as has been in effect prior to the 2011 Amendment, unless the company owning such enterprises hadmade an election to apply the provisions of the 2011 Amendment (such election cannot be later rescinded), which is to be filed with the ITA, not later than thedate prescribed for the filing of the company’s annual tax return for the respective year. A company owning a Beneficiary Enterprise or Approved Enterprisewhich made such election by June 30, 2015, will be entitled to distribute income generated by the Approved/Beneficiary Enterprise to its Israeli corporateshareholders tax free.83Until the end of 2015, we did not utilize tax benefits related to Preferred Enterprises. In 2016, we started utilizing such benefits, with a related tax rateof 12%.The New Technological Enterprise Incentives Regime—the 2017 AmendmentThe 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and became effective onJanuary 1, 2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the otherexisting tax beneficial programs under the Investment Law.The new incentives regime will apply to “Preferred Technological Enterprises” that meet certain conditions, including: (1) the R&D expenses in thethree years preceding the tax year were at least 7% on average of one year out of the company's turnover or exceeded NIS 75 million (approximately $21million) for a year; and (2) one of the following: (a) at least 20% of the workforce (or at least 200 employees) are employees whose full salary has been paidand reported in the Company’s financial statements as R&D expenses; (b) a venture capital investment approximately equivalent to at least NIS 8 million waspreviously made in the company and the company did not change its line of business; (c) growth in sales by an average of 25% or more, over the three yearspreceding the tax year, provided that the turnover was at least NIS 10 million (approximately $2.8 million), in the tax year and in each of the preceding threeyears; or (d) growth in workforce by an average of 25% or more, over the three years preceding the tax year, provided that the company employed at least 50employees, in the tax year and in each of the preceding three years.A “Special Preferred Technological Enterprise” is an enterprise that meets conditions 1 and 2 above, and in addition has total annual consolidatedrevenues at least NIS 10 billion (approximately $2.8 billion).Preferred Technological Enterprises will be subject to a reduced corporate tax rate of 12% on their income that qualifies as “Preferred TechnologyIncome”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in Development Region "A".These corporate tax rates shall apply only with respect to the portion of intellectual property developed in Israel. In addition, a Preferred Technology Companywill enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefited Intangible Assets” (as defined in the Investment Law)to a related foreign company if the Benefited Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million(approximately $56 million), and the sale receives prior approval from the IIA. Special Preferred Technological Enterprises will be subject to 6% on “PreferredTechnology Income” regardless of the company’s geographic location within Israel.In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain“Beneficiary Intangible Assets” to a related foreign company if the Beneficiary Intangible Assets were either developed by the Special Preferred TechnologyEnterprise or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from the IIA.84A Special Preferred Technology Enterprise that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million(approximately $142 million), will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income,are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt inadvance of a valid certificate from the ITA allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to bewithheld. If such dividends are, distributed to a foreign company that holds solely or together with other foreign companies at least 90% of the shares of thedistributing 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 inadvance of a valid certificate from the ITA allowing for a reduced tax rate).We reviewed the criteria for the tax rate of a “Special Preferred Technological Enterprise” and concluded that we are entitled to the reduced tax rateunder the “Preferred Technological Enterprises” tax incentive regime starting 2017. We have notified the ITA that we elected applying this status starting 2017.We cannot asses at this stage the ITA position.Law for the Encouragement of Industry (Taxes), 5729-1969The Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law defines “Industrial Company” as an Israeli residentcompany which was incorporated in Israel, of which 90% or more of its income in any tax year (exclusive of income from certain government loans) isgenerated from an “Industrial Enterprise” that it owns and located in Israel or in the “Area”, in accordance with the definition under section 3A of the IsraeliIncome Tax Ordinance (New Version) 1961, or the Ordinance. An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax yearis industrial manufacturing.An Industrial Company is entitled to certain tax benefits, including: (i) an amortization of the cost of purchased patent, the right to use patent or know-how that were purchased in good faith and are used for the development or promotion of the Industrial Enterprise, over an eight-year period, beginning from theyear in which such rights were first used, (ii) the right to elect to file consolidated tax returns with additional Israeli Industrial Companies controlled by it, and(iii) the right to deduct expenses related to public offerings in equal amounts over a period of three years beginning from the year of the offering.Eligibility for benefits under the Encouragement of Industry Law is not contingent upon the approval of any governmental authority.We believe that we qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law. There is no assurance that we qualifyor will continue to qualify as an Industrial Company or that the benefits described above will be available to us in the future.Taxation of the Company ShareholdersCapital GainsCapital gain tax is imposed on the disposition of capital assets by an Israeli resident, and on the disposition of such assets by a non-Israel resident ifthose assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights toassets located in Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Ordinance distinguishes between “RealGain” and the “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increasein the Israeli Consumer Price Index (CPI) or, in certain circumstances, according to the change in the foreign currency exchange rate, between the date ofpurchase and the date of disposition.85Generally, the capital gain accrued by individuals on the sale of our ordinary shares will be taxed at the rate of 25%. However, if the individualshareholder is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with such person’s relative or another person whocollaborates with such person on a permanent basis, 10% or more of one of the Israeli resident company’s means of control) at the time of sale or at any timeduring the preceding twelve (12) months period (or claims a deduction for interest and linkage differences expenses in connection with the purchase andholding of such shares), such gain will be taxed at the rate of 30%.The Real Gain derived by corporations will be generally subject to the ordinary corporate tax rate (23% in 2018 and thereafter).Individual and corporate shareholder dealing in securities in Israel are taxed at the tax rates applicable to business income – 23% for corporations in2018 and thereafter and a marginal tax rate of up to 47% in 2020 for individuals, unless the benefiting provisions of an applicable treaty applies.Notwithstanding the foregoing, capital gain derived from the sale of our ordinary shares by a non-Israeli shareholder may be exempt under theOrdinance from Israeli taxation provided that the following cumulative conditions, among other things, are met: (i) the shares were purchased upon or after theregistration of the securities on the stock exchange, (ii) the seller does not have a permanent establishment in Israel to which the derived capital gain isattributed. ; and (iii) with respect to our ordinary shares listed on a recognized stock exchange outside of Israel, so long as neither the shareholder nor theparticular capital gain is otherwise subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. Non-Israeli corporations will not be entitled tothe foregoing exemptions if (i) an Israeli resident has a controlling interest, directly or indirectly, alone or together with another (i.e., together with a relative, ortogether with someone who is not a relative but with whom, according to an agreement, there is regular cooperation in material matters of the company, directlyor indirectly), or together with another Israeli resident, exceed 25% in one or more of the means of control in such non-Israeli resident corporation or (ii) Israeliresidents are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli resident corporation, whether directly orindirectly.In addition, the sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, the U.S.-IsraelDouble Tax Treaty exempts U.S. resident from Israeli capital gain tax in connection with such sale, exchange or disposition provided, among others (i) the U.S.resident owned, directly or indirectly, less than 10% of an Israeli resident company’s voting power at any time within the 12 month period preceding such sale;(ii) the seller, being an individual, is present in Israel for a period or periods of less than 183 days in the aggregate at the taxable year; and (iii) the capital gainfrom the sale was not derived through a permanent establishment of the U.S. resident which is maintained in Israel the capital gain arising from such sale,exchange or disposition is not attributed to real estate located in Israel; (v) the capital gains arising from such sale, exchange or disposition is not attributed toroyalties; and (vi) the shareholder is a U.S. resident (for purposes of the U.S.-Israel Double Tax Treaty) is holding the shares as a capital asset. However, underthe U.S.-Israel Double Tax Treaty, a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed withrespect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Double Tax Treaty does notprovide such credit against any U.S. state or local taxes.86Either the purchaser, the stockbrokers or financial institution, through which payment to the seller is made, are obliged, subject to the above-mentionedexemptions, to withhold Israeli tax at source from such payment. Shareholders may be required to demonstrate that they are exempt from tax on their capitalgains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company,in the form of a merger or otherwise, the ITA may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by thisauthority or obtain a specific exemption from the ITA to confirm their status as non-Israeli resident.At the sale of securities traded on a stock exchange a detailed return, including a computation of the tax due, must be filed and an advanced paymentmust be paid on January 31 and July 31 of every tax year in respect of sales of securities made within the previous six months. However, if all tax due waswithheld at source according to applicable provisions of the Ordinance and regulations promulgated thereunder the aforementioned return need not be filed andno advance payment must be paid. Capital gain is also reportable on the annual income tax return.DividendsA distribution of dividends from income, which is not attributed to an Approved Enterprise/Beneficiary Enterprise/Preferred Enterprise to an Israeliresident individual, will generally be subject to income tax at a rate of 25%. However, a 30% tax rate will apply if the dividend recipient is a “ControllingShareholder” (as defined above) at the time of distribution or at any time during the preceding 12 months period. If the recipient of the dividend is an Israeliresident corporation, such dividend will be exempt from income tax provided the income from which such dividend is distributed was derived or accrued withinIsrael.Distribution of dividends from income attributed to a Preferred Enterprise is generally subject to a withholding tax at source at the rate of 20%.However, if such dividends are distributed to an Israeli company, no withholding tax is imposed (although, if such dividends are subsequently distributed toindividuals 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 (subject tothe receipt in advance of a valid certificate from the Israel Tax Authority allowing for an exemption). Dividends distributed from income attributed to anApproved Enterprise and/or a Beneficiary Enterprise are generally subject to a withholding tax at source at the rate of 15%. Those rates may be further reducedunder the provisions of any applicable double tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).The Ordinance generally provides that a non-Israeli resident (either individual or corporation) is subject to an Israeli income tax on the receipt ofdividends at the rate of 25% (30% if the dividends recipient is a “Controlling Shareholder” (as defined above), at the time of distribution or at any time duringthe preceding 12 months period); those rates are subject to a reduced tax rate under the provisions of an applicable double tax treaty (subject to the receipt inadvance of a valid certificate from the ITA allowing for a reduced tax rate). For example, under the U.S.-Israel Double Tax Treaty the following rates will applyin respect of dividends distributed by an Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion ofthe taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstandingshares of the voting stock of the Israeli resident paying corporation and not more than 25% of the gross income of the Israeli resident paying corporation forsuch prior taxable year (if any) consists of certain type of interest or dividends – the maximum tax rate is 12.5% on dividends, not generated by an ApprovedEnterprise or Beneficiary Enterprise, (ii) if both the conditions mentioned in section (i) above are met and the dividend is paid from an Israeli residentcompany’s income which was entitled to a reduced tax rate applicable to an Approved Enterprise or Beneficiary Enterprise – the tax rate is 15%, and (iii) in allother cases, the tax rate is 25%, or the domestic rate (if such is lower). The aforementioned rates under the U.S.-Israel Double Tax Treaty will not apply if thedividend income was derived through a permanent establishment of the U.S. resident maintained in Israel.87If the dividend is attributable partly to income derived from an Approved Enterprise, a Beneficiary Enterprise or a Preferred Enterprise, and partly toother sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income.Payors of dividends on our shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through which the securitiesare held, are generally required, subject to any of the foregoing exemption, reduced tax rates and the demonstration of a shareholder of his, her or its foreignresidency, to withhold taxes upon the distribution of dividends at a rate of 25%, provided that the shares are registered with a Nominee Company (forcorporations and individuals, whether the recipient is a Controlling Shareholder or not).A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel withrespect to such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxablesources of income in Israel with respect to which a tax return is required to be filed, and (iii) the taxpayer is not obligated to pay excess tax (as further explainedbelow).Excess TaxIndividuals who are subject to tax in Israel are also subject to an additional tax at a rate of 3% on annual income exceeding NIS 651,600 for 2020 andthereafter, which amount is linked to the Israeli Consumer Price Index)), including, but not limited to income derived from dividends, interest and capital gains.Foreign Exchange RegulationsNon-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation andwinding up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax isgenerally required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of currency exchangecontrol has not been eliminated, and may be restored at any time by administrative action.88U.S. TaxationThe following discussion describes certain material United States (“U.S.”) federal income tax consequences generally applicable to U.S. holders (asdefined below) of the purchase, ownership and disposition of our ordinary shares. This summary addresses only holders who acquire and hold ordinary sharesas “capital assets” for U.S. federal income tax purposes (generally, assets held for investment purposes).For purposes of this discussion, a “U.S. holder” is a beneficial owner of ordinary shares who is:•An individual citizen or resident of the U.S. (as determined under U.S. federal income tax rules);•a corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S.,any state thereof, or the District of Columbia;•an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or•a trust, if (a) a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control allof its substantial decisions; or (b) the trust has in effect a valid election in effect under applicable Treasury Regulations (as defined below) to be treatedas a United States person.This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income taxconsiderations that may be relevant to a decision to purchase, hold or dispose of the Company’s ordinary shares. In addition, the possible application of U.S.federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws is not considered. This discussion is based on current provisions of the InternalRevenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated under the Code by the U.S. Treasury Department (including proposed andtemporary regulations) (the “Treasury Regulations”), rulings, current administrative interpretations and official pronouncements by the Internal RevenueService (the “IRS”), and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, with a retroactiveeffect. Such changes could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS would not assert, orthat a court would not sustain, a position contrary to any of the tax consequences described below.This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the holder’sparticular circumstances, including, but not limited to:•persons who own, directly, indirectly or constructively, 10% or more (by voting power or value) of our outstanding voting shares;•persons who hold the ordinary shares as part of a hedging, straddle or conversion transaction;•persons whose functional currency is not the U.S. dollar;•persons who acquire their ordinary shares in a compensatory transaction;89•broker-dealers;•insurance companies;•regulated investment companies;•real estate investment companies;•qualified retirement plans, individual retirement accounts and other tax-deferred accounts;•traders who elect to mark-to-market their securities;•tax-exempt organizations;•banks or other financial institutions;•persons subject to special tax accounting rules as a result of any item of gross income with respect to ordinary shares being taken into account in anapplicable financial statement;•U.S. expatriates and certain former citizens and long-term residents of the United States; and•persons subject to the alternative minimum tax.The tax treatment of a partner in a partnership (or other entity or arrangement classified as a partnership for U.S. federal income tax purposes) maydepend on both the partnership’s and the partner’s status and the activities of the partnership. Partnerships (or other entities or arrangements classified as apartnership for U.S. federal income tax purposes) that are beneficial owners of ordinary shares, and their partners and other owners, should consult their owntax advisers regarding the tax consequences of the acquisition, ownership and disposition of ordinary shares.THIS SUMMARY OF MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLYAND IS NOT TAX ADVICE. EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAXCONSEQUENCES TO IT OF AN INVESTMENT IN THE ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE UNITED STATESFEDERAL INCOME TAX LAWS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE UNITED STATES FEDERAL ESTATE OR GIFTTAX RULES OR UNDER THE LAWS OF ANY FOREIGN, STATE OR LOCAL JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.Distributions on the Ordinary SharesWe currently do not intend to distribute dividends for at least the next several years. However, if we make any distributions of cash or other property toa U.S. holder of our ordinary shares, the amount of the distribution for U.S. federal income tax purposes will equal the amount of cash and the fair market valueof any property distributed and will also include the amount of Israeli taxes withheld, if any, as described above under “[Israel Taxation] — Dividends” above.In general (and subject to the PFIC rules discussed below), any distribution paid by us on the ordinary shares to a U.S. holder will be treated as dividend incometo the extent the distribution does not exceed our current and/or accumulated earnings and profits, as determined under U.S. federal income tax principles. Theamount of any distribution which exceeds these earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax basisin its ordinary shares to the extent thereof, and then as capital gain income (long-term capital gain if the U.S. holder’s holding period exceeds one year), fromthe deemed disposition of the ordinary shares (subject to the PFIC rules discussed below). Corporate holders generally will not be allowed a deduction fordividends received on the ordinary shares.90The amount of any dividend paid in NIS (including amounts withheld to pay Israeli withholding taxes) will equal the U.S. dollar value of the NIScalculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. holder, regardless of whether the NIS are converted intoU.S. dollars. A U.S. holder will have a tax basis in the NIS equal to their U.S. dollar value on the date of receipt. If the NIS received are converted into U.S.dollars on the date of receipt, the U.S. holder should generally not be required to recognize foreign currency gain or loss in respect of the distribution. If the NISreceived are not converted into U.S. dollars on the date of receipt, a U.S. holder may recognize foreign currency gain or loss on a subsequent conversion orother disposition of the NIS. Such gain or loss will be treated as U.S. source ordinary income or loss.Dividends paid by us generally will be foreign source, “passive income” for U.S. foreign tax credit purposes. U.S. holders may elect to claim as aforeign tax credit against their U.S. federal income tax liability the Israeli income tax withheld from dividends received on the ordinary shares. The Codeprovides limitations on the amount of foreign tax credits that a U.S. holder may claim. U.S. holders that do not elect to claim a foreign tax credit may insteadclaim a deduction for Israeli income tax withheld, but only for a year in which these U.S. holders elect to do so for all foreign income taxes. The rules relatingto foreign tax credits are complex (and may also be impacted by the tax treaty between the United States and Israel), and you should consult your tax advisor todetermine whether you would be entitled to this credit.Under current law, certain distributions treated as dividends that are received by an individual U.S. holder from a “qualified foreign corporation”generally qualify for a 20% reduced maximum tax rate so long as certain holding period and other requirements are met. A non-U.S. corporation (other than acorporation that is treated as a PFIC with respect to the U.S. holder for the taxable year in which the dividend is paid or the preceding taxable year) generallywill be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which theSecretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or(ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. Dividends paid by us in ataxable year in which we are not a PFIC and with respect to which we were not a PFIC in the preceding taxable year with respect to the U.S. holder areexpected to be eligible for the 20% reduced maximum tax rate, although we can offer no assurances in this regard. However, any dividend paid by us in ataxable year in which we are a PFIC or were a PFIC in the preceding taxable year with respect to the U.S. holder will be subject to tax at regular ordinaryincome rates (along with any applicable additional PFIC tax liability, as discussed below).The additional 3.8% tax on “net investment income” (described below) may apply to dividends received by certain U.S. holders who meet certainmodified adjusted gross income thresholds.91Sale, Exchange or Other Taxable Disposition of the Ordinary SharesUpon the sale, exchange or other taxable disposition of the ordinary shares (subject to the PFIC rules discussed below), a U.S. holder generally willrecognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. holder’s tax basis in the ordinary shares. The gainor loss recognized on the sale or exchange of the ordinary shares generally will be long-term capital gain (currently taxable at a reduced rate for non-corporateU.S. holders) or loss if the U.S. holder’s holding period of the ordinary shares is more than one year at the time of the disposition. The deductibility of capitallosses is subject to limitations.Gain or loss recognized by a U.S. holder on a sale or exchange of ordinary shares generally will be treated as U.S. source income or loss for U.S.foreign tax credit purposes. Under the tax treaty between the United States and Israel, gain derived from the sale, exchange or other taxable disposition ofordinary shares by a holder who is a resident of the U.S. for purposes of the treaty and who sells the ordinary shares within Israel may be treated as foreignsource income for U.S. foreign tax credit purposes.The additional 3.8% tax on “net investment income” (described below) may apply to certain U.S. holders who meet certain modified adjusted grossincome thresholds, including capital gains.Passive Foreign Investment CompaniesIn general, a foreign (i.e., non-U.S.) corporation will be a PFIC for any taxable year in which, after applying the relevant look-through rules withrespect to the income and assets of its subsidiaries, either (1) 75% or more of its gross income in the taxable year is “passive income,” or (2) assets held for theproduction of, or that produce, passive income comprise 50% or more of the average of its total asset value in the taxable year. For purpose of the income test,passive income generally includes dividends, interest, royalties, rents, annuities and net gains from the disposition of assets, which produce passive income. Forpurposes of the asset test, assets held for the production of passive income includes assets held for the production of, or that produce dividends, interest,royalties, rents, annuities, and other income that are considered passive income for purposes of the income test. In determining whether we meet the asset test,cash is considered a passive asset and the total value of our assets generally will be treated as equal to the sum of the aggregate fair market value of ouroutstanding stock plus our liabilities. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, asowning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income. The income test isconducted at the taxable year-end. The asset test is conducted on a quarterly basis and the quarterly results are then averaged together.If a corporation is treated as a PFIC for any year during a U.S. holder’s holding period and the U.S. holder does not timely elect to treat the corporationas a “qualified electing fund” under Section 1295 of the Code or elect to mark its ordinary shares to market (both elections described below), any gain on thedisposition of the shares will be treated as ordinary income, rather than capital gain, and the holder will be required to compute its tax liability on that gain, aswell as on dividends and other distributions, as if the income had been earned ratably over each day in the U.S. holder’s holding period for the shares. Theportion of the gain and distributions allocated to prior taxable years in which a corporation was a PFIC will be ineligible for any preferential tax rate otherwiseapplicable to any “qualified dividend income” or capital gains, and will be taxed at the highest ordinary income tax rate in effect for each taxable year to whichthis portion is allocated. An interest charge will be imposed on the amount of the tax allocated to these taxable years. A U.S. holder may elect to treat acorporation as a qualified electing fund only if the corporation complies with requirements imposed by the IRS to enable the shareholder and the IRS todetermine the corporation’s ordinary earnings and net capital gain. Additionally, if a corporation is a PFIC, a U.S. holder who acquires shares in the corporationfrom a decedent generally will be denied the normally available step-up in tax basis to fair market value for the shares at the date of death of the decedent andinstead will have a tax basis equal to the decedent’s tax basis if lower than fair market value. These adverse tax consequences associated with PFIC status couldresult in a material increase in the amount of tax that a U.S. holder would owe and an imposition of tax earlier than would otherwise be imposed and additionaltax form filing requirements. Unless otherwise provided by the IRS, if a corporation is classified as a PFIC, a U.S. person that is a direct or indirect holdergenerally will be required to file IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund,or any applicable successor form, to report its ownership interest in such entity.92If a corporation is treated as a PFIC with respect to a U.S. holder for any taxable year, the U.S. holder will be deemed to own shares in any of theforeign entities in which such corporation holds equity interests that are also PFICs (or “lower-tier PFICs”), and the U.S. holder may be subject to the taxconsequences described above with respect to the shares of such lower-tier PFIC such U.S. holder would be deemed to own.Status of Nova as a PFIC. Under the income test, less than 75% of our gross income was passive income in 2020. Under the asset test, while wecontinued to have substantial amounts of cash and short-term deposits and the market value of our ordinary shares continued to be volatile, a determination ofthe value of our assets by reference to the average market value of our ordinary shares and our liabilities results in a conclusion that the average value of ourpassive assets did not exceed 50% of the average value of our gross assets in 2020. Nonetheless, there is a risk that we were a PFIC in 2020 or we will be aPFIC in 2021 or subsequent years. Additionally, due to the complexity of the PFIC provisions and the limited authority available to interpret such provisions,there can be no assurance that our determination regarding our PFIC status could not be successfully challenged by the IRS.Available Elections. If we become a PFIC for any taxable year, an election to treat us as a “qualified electing fund” or to “mark-to-market” ourordinary shares may mitigate the adverse tax consequences of PFIC status to a U.S. holder.If a U.S. holder makes a qualified electing fund election (a “QEF election”) for its ordinary shares that is effective from the first taxable year that theU.S. holder holds our ordinary shares and during which we are a PFIC, the electing U.S. holder will avoid the adverse consequences of our being classified as aPFIC, but will instead be required to include in income a pro rata share of our net capital gain, if any, and other earnings and profits (“ordinary earnings”) aslong-term capital gains and ordinary income, respectively, on a current basis, in each case whether or not distributed, in the taxable year of the U.S. holder inwhich or with which our taxable year ends. A subsequent distribution of amounts that were previously included in the gross income of U.S. holders should notbe taxable as a dividend to those U.S. holders who made a QEF election. In the event we incur a net loss for a taxable year, such loss will not be available as adeduction to an electing U.S. holder, and may not be carried forward or back in computing our net capital gain or ordinary earnings in other taxable years. Thetax basis of the shares of an electing U.S. holder generally will be increased by amounts that are included in income, and decreased by amounts distributed butnot taxed as dividends, under the QEF rules described above. In order to make (or maintain) a QEF election, the U.S. holder must annually complete and fileIRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form.However, we do not expect that we will prepare or provide to U.S. Holders a “PFIC annual information statement,” which would enable a U.S. Holder to makea QEF election.93Alternatively, if a U.S. holder elects to “mark-to-market” its ordinary shares, the U.S. holder generally will include in its income any excess of the fairmarket value of our ordinary shares at the close of each taxable year over the holder’s adjusted basis in such ordinary shares. A U.S. holder generally will beallowed an ordinary deduction for the excess, if any, of the adjusted tax basis of the ordinary shares over the fair market value of the ordinary shares as of theclose of the taxable year, or the amount of any net mark-to-market gains recognized for prior taxable years, whichever is less. A U.S. holder’s adjusted tax basisin the ordinary shares generally will be adjusted to reflect the amounts included or deducted under the mark-to-market election. Additionally, any gain on theactual sale or other disposition of the ordinary shares generally will be treated as ordinary income. Ordinary loss treatment also will apply to any lossrecognized on the actual sale or other disposition of ordinary shares to the extent that the amount of such loss does not exceed the net mark-to-market gainspreviously included with respect to such ordinary shares. If a U.S. holder makes a valid mark-to-market election with respect to our ordinary shares for the firsttaxable year of the U.S. holder in which the U.S. holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be a PFIC, suchholder generally will not be subject to the PFIC rules described above in respect of its ordinary shares. A mark-to-market election applies to the tax year forwhich the election is made and to each subsequent year, unless our ordinary shares cease to be marketable, as specifically defined, or the IRS consents torevocation of the election. No view is expressed regarding whether our ordinary shares are marketable for these purposes or whether the election will beavailable. However, because a mark-to-market election likely cannot be made for any lower-tier PFICs, if we are a PFIC, a U.S. holder will generally continueto be subject to the PFIC rules discussed above with respect to such holder’s indirect interest in any investments that we hold that are treated as an equityinterest in a PFIC for U.S. federal income tax purposes. As a result, it is possible that any mark-to-market election will be of limited benefit.If a U.S. holder makes either the QEF election or the mark-to-market election, distributions and gain will not be recognized ratably over the U.S.holder’s holding period or be subject to an interest charge as described above. Further, the denial of basis step-up at death described above will not apply. If aU.S. holder makes the QEF election, gain on the sale of the ordinary shares will be characterized as capital gain. However, U.S. holders making one of thesetwo elections may experience current income recognition, even if we do not distribute any cash. The elections must be made with the U.S. holder’s federalincome tax return for the year of election, filed by the due date of the return (as it may be extended) or, under certain circumstances provided in applicableTreasury Regulations, subsequent to that date.The foregoing discussion relating to the QEF election and mark-to-market elections assumes that a U.S. holder makes the applicable election withrespect to the first year in which Nova qualifies as a PFIC. If the election is not made for the first year in which Nova qualifies as a PFIC, the procedures formaking the election and the consequences of election will be different.SPECIFIC RULES AND REQUIREMENTS APPLY TO BOTH THE QEF ELECTION AND THE MARK-TO-MARKET ELECTION, AND YOUARE URGED TO CONSULT YOUR TAX ADVISOR CONCERNING OUR PFIC STATUS AND THE VARIOUS ELECTIONS YOU CAN MAKE.94Medicare Tax on Net Investment IncomeA U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a3.8% 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 adjustedgross income for the taxable year over a certain threshold. A U.S. holder’s “net investment income” generally may include its dividend income and its net gainsfrom the disposition of shares, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade orbusiness that consists of certain passive or trading activities). If you are a U.S. holder that is an individual, estate or trust, you are urged to consult your taxadvisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the shares and the interaction of these ruleswith the rules applicable to income included as a result of the QEF election.United States Information Reporting and Backup WithholdingIn general, U.S. holders may be subject to certain information reporting requirements under the Code relating to their purchase and/or ownership ofstock of a foreign corporation such as the Company. Failure to comply with these information reporting requirements may result in substantial penalties.Specifically, certain U.S. Holders holding specified foreign financial assets, including our ordinary shares, with an aggregate value in excess of theapplicable U.S. dollar threshold, are subject to certain exceptions, required to report information relating to our Ordinary Shares by attaching a complete IRSForm 8938, Statement of Specified Foreign Financial Assets, to their tax returns, for each year in which they hold our ordinary shares. U.S. Holders are urged toconsult their own tax advisors regarding information reporting requirements relating to the ownership of our Ordinary Shares.In addition, and as discussed in the section of this annual report entitled “U.S. Taxation – Passive Foreign Investment Companies”, if a corporation isclassified as a PFIC, a U.S. person that is a direct or indirect holder generally will be required to file an informational return annually on IRS Form 8621,Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form, to report itsownership interest in such entity, unless otherwise provided by the IRS.Dividend payments and proceeds from the sale or disposal of ordinary shares may be subject to information reporting to the IRS and possible U.S.federal backup withholding. Certain holders (including, among others, corporations) generally are not subject to information reporting and backup withholding.A U.S. holder generally will be subject to backup withholding if such holder is not otherwise exempt and such holder:•fails to furnish its taxpayer identification number, or TIN, which, for an individual, is ordinarily his or her social security number;•furnishes an incorrect TIN;•is notified by the IRS that it is subject to backup withholding because it has previously failed to properly report payments of interest or dividends; or95•fails to certify, under penalties of perjury, that it has furnished a correct TIN and that the IRS has not notified the U.S. holder that it is subject to backupwithholding.Any U.S. holder who is required to establish exempt status generally must file IRS Form W-9 (“Request for Taxpayer Identification Number andCertification”).Backup withholding is not an additional tax and may be claimed as a refund or a credit against the U.S. federal income tax liability of a U.S. Holder,provided that the required information is timely furnished to the IRS.10.FDividends and Paying AgentsNot applicable.10.GStatements by ExpertsNot applicable.10.HDocuments on DisplayAs a foreign private issuer, are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and ourofficers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the ExchangeAct. Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the ExchangeAct. In addition, we are not be required under the Exchange Act to file annual or other reports and consolidated financial statements with the SEC as frequentlyor as promptly as U.S. companies whose securities are registered under the Exchange Act. Instead, we must file with the SEC, within 120 days after the end ofeach fiscal year, or such other applicable time as required by the SEC, an annual report on Form 20-F containing consolidated financial statements audited byan independent registered public accounting firm. We also intend to furnish certain other material information to the SEC under cover of Form 6-K.We maintain a corporate website at www.novami.com. Information contained on, or that can be accessed through, our website does not constitute apart of this annual report on Form 20-F. We have included our website address in this annual report on Form 20-F solely as an inactive textual reference.10.ISubsidiary InformationNot applicable.Item 11. Quantitative and Qualitative Disclosures About Market RiskMarket RiskMarket risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. TheCompany is exposed to market risk in the area of foreign exchange rates, as described below.The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments that could expose it tosignificant market risk.96Impact of Currency FluctuationBecause our results are reported in U.S. Dollars, changes in the rate of exchange between the Dollar and local currencies in those countries in whichwe operate (primarily the NIS) will affect the results of our operations. The dollar cost of our operations in countries other than the U.S., is negativelyinfluenced by revaluation of the U.S. dollar against other currencies. During 2020, the value of the U.S. dollar devaluated against the NIS by approximately7.0% As of December 31, 2020, the majority of our net monetary assets were denominated in dollars and the remainder was denominated mainly in NIS. Netmonetary assets that are not denominated in dollars or dollar-linked NIS were affected by the currency fluctuations in 2020 and are expected to continue to beaffected by such currency fluctuations in 2021. As of December 31 ,2020 the Company recorded a NIS and Israel CPI linked lease liability, under theimplementation of ASC 842 in the amount of $23 million (including exchange rate differences of $1.9 million).In 2019, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $108 million with settlement datesthrough 2019-2020, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $108 million. Inaccordance with ASC 815-10, we recorded in 2019 an increase of approximately $0.2 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated innon-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forwardcontracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as ofDecember 31, 2019, with all other variables held constant, would decrease the fair value of our net liabilities denominated in NIS, held at December 31, 2019,by approximately $1.2 million.In 2020, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $100 million with settlement datesthrough 2020-2021, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $100 million. Inaccordance with ASC 815-10, we recorded in 2020 an increase of approximately $0.6 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated innon-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forwardcontracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as ofDecember 31, 2020, with all other variables held constant, would decrease the fair value of our net liabilities denominated in NIS, held at December 31, 2020,by approximately $1.9 million.Item 12. Description of Securities Other than Equity SecuritiesNot applicable.97PART IIItem 13. Defaults, Dividend Arrearages and DelinquenciesNone.Item 14. Material Modification to the Rights of Security Holders and Use of ProceedsNot applicable.Item 15. Controls and Procedures(a) Our management, including our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls andprocedures as of December 31, 2020. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submits under theExchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls andprocedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is accumulated and communicated to the our management, including our chief executive officer and chief financial officer, orpersons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the foregoing, our chief executive officerand chief financial officer have concluded that, as of December 31, 2020, our disclosure controls and procedures were effective.(b)Our management, under the supervision of our chief executive officer and chief financial officer, is responsible for establishing and maintainingadequate internal control over our financial reporting. The Company’s internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) ofthe Exchange Act, means a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies andprocedures that:—pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;—provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordancewith generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizationsof our management and directors; and—provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets thatcould have a material effect on our financial statements.Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2020, based on the criteria establishedin Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on thisevaluation, our management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting was effective.98(c)Kost Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & Young, has issued an attestation reporton the effectiveness of our internal control over financial reporting, as stated in their report included herein. See “Report of Independent Registered PublicAccounting Firm” on page F-3.(d)There were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the periodcovered by this annual report that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting.Item 16A. Audit Committee Financial ExpertOur board of directors has determined that our audit committee includes one audit committee financial expert, as defined by Item 16A of Form 20-F.Our board of directors has determined that Ms. Dafna Gruber is an “audit committee financial expert” as defined by the SEC rules as well as an independentdirector as such term is defined by Rule 5605(a)(2) of the Nasdaq Stock Market and has the requisite financial experience as defined by the Nasdaq rules.Item 16B. Code of EthicsThe Company has adopted a written code of conduct that applies to all Company employees, including the Company’s directors, principal executiveofficer, principal financial officer and principal accounting officer.You may review our code of conduct on our website: https://www.novami.com/, under “Investors/Corporate Governance”.Item 16C. Principal Accountant Fees and ServicesDuring the last three fiscal years, Kost Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & YoungGlobal (“Kost Forer Gabbay & Kasierer”) has acted as our registered public accounting firm and independent auditors. The following table providesinformation regarding fees paid by us to Kost Forer Gabbay & Kasierer for all services, including audit services, for the years ended December 31, 2019 and2020:20192020 Audit Fees$350,000$586,000Tax Fees$70,000$89,000Other Fees$84,000$125,000Total$504,000$800,000“Audit fees” are fees associated with the annual audit of the Company consolidated financial statements and services that generally the independentaccountant provides, such as consents and assistance with and review of documents filed with the SEC as well as certain fees related to the audit in connectionwith our issuance of convertible senior notes in October 2020. The audit fee also includes consultations on various accounting issues, performance of localstatutory audits, fees associated with the audit of management assessment of internal control over financial reporting, annual tax returns and audit of reports toIIA. “Tax Fees” are fees related to ad hoc tax consulting services and opinions.99“Other Fees” include services related to SEC regulation consulting, organizational consultation, and due diligence services.Our audit committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain services. Pursuant to thispolicy, which is designed to assure that such engagements do not impair the independence of our auditors, all audit, audit related and tax services must bespecifically approved by the audit committee and certain other non-audit, non-audit related and non-tax services may be approved without consideration ofspecific case-by-case provided certain terms and procedures are met. The Company’s audit committee approved all of the services provided by Kost ForerGabbay & Kasierer in fiscal years 2020 and 2019.Item 16D. Exemptions from the Listing Standards for Audit CommitteesThe Company has not obtained any exemption from applicable audit committee listing standards.Item 16E. Purchases of Equity Securities by the Issuer and Affiliates PurchasersIn November 2018, we announced a $25 million repurchase program of our ordinary shares. Through December 31, 2020, we spent an aggregate of$14.5 million to repurchase 556,603 ordinary shares under our share repurchase program. The following table provides information regarding our repurchasesof our ordinary shares for each month included in the period covered by this annual report on Form 20-F:Period(a) Total Numberof OrdinaryShares Purchased(b) AveragePrice Paid perOrdinary Share(c) Total NumberofOrdinary SharesPurchased asPartofPubliclyAnnouncedPlans orPrograms(d) ApproximateDollarValue of SharesthatMay Yet BePurchasedUnder the PlansorPrograms (inmillions)March 202044032.04477,187$13.03April 202079,41631.92556,603$10.49On October 11, 2020, as part of the authorization of the Senior Convertible Notes Offering, the Company’s board of directors approved and authorizeda share repurchase for an aggregate amount of up to $ 20 million (see note 16) in connection of which, on October 13, 2020, the Company repurchased 170,910ordinary shares for an aggregate amount of $10 million.Item 16F. Change In Registrant’s Certifying AccountantNone.100Item 16G. Corporate GovernanceThere are no significant ways in which the Company’s corporate governance practices differ from those followed by domestic companies listed on theNasdaq Global Select Market.Item 16H. Mine Safety DisclosureNot applicable.PART IIIItem 17. Financial StatementsNot applicable.Item 18. Financial StatementsSee pages F-1 through F-[30].Item 19. ExhibitsSee Exhibit Index.101NOVA MEASURING INSTRUMENTS LTD.CONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2020NOVA MEASURING INSTRUMENTS LTD.CONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2020ContentsPageReports of Independent Registered Public Accounting FirmF-3 - F-5Consolidated Balance SheetsF-6Consolidated Statements of OperationsF-7Consolidated Statements of Comprehensive IncomeF-8Consolidated Statements of Changes in Shareholders' EquityF-9Consolidated Statements of Cash FlowsF-10Notes to Consolidated Financial StatementsF-11 - F-34F - 2  Kost Forer Gabbay & Kasierer144 Menachem Begin Road, Building A,Tel-Aviv 6492102, IsraelTel: +972-3-6232525Fax: +972-3-5622555ey.comREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and the Board of Directors ofNOVA MEASURING INSTRUMENTS LTD.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Nova Measuring Instruments Ltd. (the Company) as of December 31, 2020 and 2019, therelated consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period endedDecember 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financialstatements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and itscash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internalcontrol over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2021, expressed an unqualified opinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company inaccordance 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 reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures toassess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Suchprocedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluatingthe accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Webelieve that our audits provide a reasonable basis for our opinion.Critical Audit MattersThe critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or requiredto be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved ourespecially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on theconsolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on thecritical audit matters or on the accounts or disclosures to which they relate.F - 3Valuation of excess and obsolete inventory reserve Description of the MatterThe Company’s inventories totaled $61.7 million as of December 31, 2020. As described in Note 2h to the consolidatedfinancial statements, the Company assesses the value of inventories, including raw materials, service inventory, work-in-processand finished goods, in each reporting period, and values its inventories at the lower of cost or net realizable value. Reserves forpotential excess and obsolete inventory are made based on management's analysis of inventory levels, future sales forecasts, theexpected consumption of service spare parts, and market conditions. Auditing management's estimates for valuation of inventories involved subjective auditor judgment due to the significantassumptions made by management about the future salability of the inventories. These assumptions include the assessment, byinventory category (finished goods, work-in-process, service inventory and raw materials), of future usage and market demandfor the Company's products. How We Addressed the Matterin Our AuditWe obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over theCompany's excess and obsolete inventory reserve process, including management's assessment of the underlying assumptionsand data. Our substantive audit procedures included, among others, evaluating the significant assumptions stated above and the accuracyand completeness of the underlying data management used to value excess and obsolete inventory. We compared the cost of on-hand inventories to historical sales and evaluated adjustments to sales forecasts for specific product considerations, such astechnological changes or alternative uses. We also assessed the historical accuracy of management's estimates and performedsensitivity analyses over the significant assumptions to evaluate the changes in the obsolete and excess inventory estimates thatwould result from changes in the underlying assumptions. Accounting for the Issuance of Convertible Senior Notes Description of the MatterAs explained in Note 16 to the consolidated financial statements, in October 2020, the Company issued $200 million of 0%Convertible Senior Notes due 2025 (the "Notes"). In accounting for the issuance of the Notes, management allocated the totalproceeds into liability and equity components. The carrying amount of the liability component was calculated by estimating thefair value of the Notes if there were no associated convertible features. The carrying amount of the equity component,representing the conversion option was determined by deducting the fair value of the liability component from the principalamount of the Notes. The valuation model used in determining the fair value of the liability component for the Notes includesassumptions subject to management's judgment, including the synthetic credit rating. Auditing management’s evaluation of the transaction was complex and required a high degree of auditor judgment due to theinherent complexity in assessing the accounting for the Notes. This required an assessment of the valuation of the fair value ofthe liability component of the Notes, which included evaluation of assumptions, such as the Company’s synthetic credit rating,subject to management's judgment in determining the borrowing rate. How We Addressed the Matterin Our AuditWe obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls in respect of theCompany’s Notes, including controls over the initial recognition and measurement of the Notes and recording of the associatedliability and equity components. To test the initial accounting for the Notes, our procedures included, among others, inspection of the underlying agreements andtesting management’s evaluation and application of the relevant accounting guidance. We also involved our valuationspecialists to evaluate the Company’s determination of the fair value of the liability component of the Notes. We tested theappropriateness of the methodology, evaluated the reasonableness of the underlying assumptions used to determine theborrowing rate, such as the Company’s synthetic credit rating, and performed an independent calculation of the carryingamounts attributable to the liability and equity components. Additionally, we tested the source information underlying thevaluation assumptions and inputs used to determine the fair value and the mathematical accuracy of the calculation. We alsoevaluated the Company’s disclosures regarding the issuance of the Notes included in Note 16./s/ Kost Forer Gabbay & KasiererKOST FORER GABBAY & KASIERERA Member of Ernst & Young GlobalWe have served as the Company's auditor since 2015.Tel-Aviv, IsraelMarch 1, 2021F - 4  Kost Forer Gabbay & Kasierer144 Menachem Begin Road, Building A,Tel-Aviv 6492102, IsraelTel: +972-3-6232525Fax: +972-3-5622555ey.comREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and the Board of Directors of NOVA MEASURING INSTRUMENTS LTD.Opinion on Internal Control Over Financial ReportingWe have audited Nova Measuring Instruments Ltd. internal control over financial reporting as of December 31, 2020, based on criteria established in InternalControl - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Inour opinion, Nova Measuring Instruments Ltd. (the Company) maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2020, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedbalance sheets of the Company as of December 31, 2020, and 2019, the related consolidated statements of operations, comprehensive income, shareholders'equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes of the Company, and our report dated March 1,2021, expressed an unqualified opinion thereon.Basis for OpinionThe Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registeredwith the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rulesand regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ Kost Forer Gabbay & KasiererKOST FORER GABBAY & KASIERERA Member of Ernst & Young GlobalWe have served as the Company’s auditor since 2015.Tel-Aviv, IsraelMarch 1, 2021F - 5NOVA MEASURING INSTRUMENTS LTD.CONSOLIDATED BALANCE SHEETS(U.S. dollars in thousands, except share data) As of December 31, 2 0 2 0 2 0 1 9 ASSETS Current assets Cash and cash equivalents $232,304 $31,748 Short-term interest-bearing bank deposits 191,567 154,533 Trade accounts receivable, net of allowance of $70 and $135 at December 31, 2020 and 2019, respectively 63,314 51,603 Inventories (Note 3) 61,734 48,362 Other current assets (Note 4) 9,782 16,685 Total current assets 558,701 302,931 Non-Current assets Interest-bearing bank deposits 2,547 2,813 Restricted interest-bearing bank deposits 1,476 2,000 Deferred tax assets (Note 11) 2,869 4,554 Other long-term assets 462 437 Severance pay funds (Note 8) 1,281 1,210 Operating lease right-of-use assets (Note 14) 29,109 28,256 Property and equipment, net (Note 5) 34,168 30,566 Intangible assets, net (Note 6) 5,059 7,562 Goodwill 20,114 20,114 Total non-current assets 97,085 97,512 TOTAL ASSETS $655,786 $400,443 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Trade accounts payable $24,096 $20,706 Deferred revenues 4,717 2,256 Operating lease current liabilities (Note 14) 3,703 2,777 Other current liabilities (Note 7) 28,418 20,493 Total current liabilities 60,934 46,232 Non-Current liabilities Convertible senior notes, net (Note 16)178,808-Accrued severance pay (Note 8) 3,719 3,294 Operating lease long-term liabilities (Note 14) 31,905 30,536 Other long-term liabilities 8,882 5,842 Total non-current liabilities 223,314 39,672 Commitments and contingencies (Note 9) TOTAL LIABILITIES 284,248 85,904 SHAREHOLDERS’ EQUITY (Note 10) Ordinary shares, NIS 0.01 par value - Authorized 40,000,000 shares at December 31, 2020 and 2019; Issued andOutstanding 28,176,862, and 28,005,617 at December 31, 2020 and 2019, respectively 74 74 Additional paid-in capital 129,274 120,737 Accumulated other comprehensive income 570 15 Retained earnings 241,620 193,713 Total shareholders’ equity 371,538 314,539 Total liabilities and shareholders’ equity $655,786 $400,443 The accompanying notes are an integral part of the consolidated financial statements.F - 6NOVA MEASURING INSTRUMENTS LTD.CONSOLIDATED STATEMENTS OF OPERATIONS(U.S. dollars in thousands, except share and per share data) Year ended December 31, 2 0 2 0 2 0 1 9 2 0 1 8 Revenues: Products $209,320 $167,200 $193,298 Services 60,076 57,709 57,836 Total revenues 269,396 224,909 251,134 Cost of revenues: Products 78,555 67,300 71,706 Services 37,918 35,789 34,194 Total cost of revenues 116,473 103,089 105,900 Gross profit 152,923 121,820 145,234 Operating expenses: Research and development, net (Note 2m) 53,015 44,508 45,451 Sales and marketing 29,321 28,213 27,993 General and administrative 12,514 10,066 8,735 Amortization of intangible assets (Note 6) 2,503 2,625 2,613 Total operating expenses 97,353 85,412 84,792 Operating income 55,570 36,408 60,442 Financing income, net (Note 15) 926 3,078 2,984 Income before taxes on income 56,496 39,486 63,426 Income tax expenses 8,589 4,315 9,051 Net income 47,907 35,171 $54,375 Earnings per share: Basic$1.71 $1.26 $1.94 Diluted$1.65 $1.23 $1.89 Shares used in calculation of earnings per share: Basic 28,096,814 27,895,096 28,022,486 Diluted 28,949,739 28,574,202 28,765,329 The accompanying notes are an integral part of the consolidated financial statements.F - 7NOVA MEASURING INSTRUMENTS LTD.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(U.S. dollars in thousands) Year ended December 31, 2 0 2 0 2 0 1 9 2 0 1 8 Net income $47,907 $35,171 $54,375 Other comprehensive income (loss) ("OCI") (Note 13) related to: Unrealized gain (loss) from cash flow hedges 1,351 236 (489)Less: reclassification adjustment for net gain (loss) included in net income (796) (33) 189 Other comprehensive income (loss) 555 203 (300)Total comprehensive income $48,462 $35,374 $54,075 The accompanying notes are an integral part of the consolidated financial statements.F - 8NOVA MEASURING INSTRUMENTS LTD.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY(U.S. dollars in thousands, except share amounts) Ordinary Shares AdditionalPaid-inCapital AccumulatedOtherComprehensiveIncome (Loss) RetainedEarnings TotalShareholders'Equity Number Amount Balance as of January 1, 2018 27,898,304 $74 $122,426 $112 $104,124 $226,736 Cumulative effect from adoption of anew accounting standard – ASC 606 - - - - 43 43 Issuance of shares upon exercise ofoptions 99,285 (*) 361 - - 361 Issuance of shares upon vesting ofRSU 119,916 (*) (*) - - - Share based compensation - - 4,326 - - 4,326 Share repurchase at cost (200,000) (*) (4,801) - - (4,801)Other comprehensive income - - - (300) - (300)Net income - - - - 54,375 54,375 Balance as of December 31, 2018 27,917,505 74 122,312 (188) 158,542 280,740 Issuance of shares upon exercise ofoptions 246,373 (*) 492 - - 492 Issuance of shares upon vesting ofRSU 118,486 (*) (*) - - - Share based compensation - - 5,092 - - 5,092 Share repurchase at cost (276,747) (*) (7,159) - - (7,159) Other comprehensive income - - - 203 - 203 Net income - - - - 35,171 35,171 Balance as of December 31, 2019 28,005,617 74 120,737 15 193,713 314,539 Issuance of shares upon exercise ofoptions 302,730 (*) 367 - - 367 Issuance of shares upon vesting ofRSU 119,281 (*) (*) - - - Share based compensation - - 6,949 - - 6,949 Equity component of convertiblesenior notes, net of issuance costsand tax--13,770--13,770Share repurchase at cost(250,766)(*)(12,549)--(12,549)Other comprehensive income - - - 555 - 555 Net income - - - - 47,907 47,907 Balance as of December 31, 2020 28,176,862 74 129,274 570 241,620 371,538 (*) Less than $1The accompanying notes are an integral part of the consolidated financial statements.F - 9NOVA MEASURING INSTRUMENTS LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS(U.S. dollars in thousands) Year ended December 31, 2 0 2 0 2 0 1 9 2 0 1 8 Cash flows from operating activities: Net income $47,907 $35,171 $54,375 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 5,875 5,401 5,071 Amortization of intangible assets 2,503 2,625 2,613 Amortization of debt discount and issuance costs 868 - - Share-based compensation 6,949 5,092 4,326 Net effect of exchange rate fluctuation(1,584)(510)1,015Changes in assets and liabilities: Trade accounts receivables, net (11,711) 1,928 (12,539)Inventories (16,271) (7,518) (8,123)Other current and long-term assets 6,878 (6,161) (3,648)Deferred tax assets, net (193) (681) (1,916)Operating lease right-of-use assets 1,351 2,372 -Trade accounts payables 3,255 1,691 3,261Deferred revenues2,461(1,728)(6,350)Operating lease liabilities2,2952,685-Other current and long-term liabilities9,31665(974)Accrued severance pay, net35426013Net cash provided by operating activities 60,253 40,692 37,124 Cash flows from investment activities: Increase in short-term and long-term interest-bearing bank deposits (36,016) (4,181) (32,998)Purchase of property and equipment (6,443) (21,269) (3,678) Net cash used in investing activities (42,459) (25,450) (36,676) Cash flows from financing activities: Proceeds from the issuance of convertible senior notes, net of issuance costs193,588--Purchases of treasury shares (12,549) (7,159) (4,801)Proceeds from exercise of options 367 492 361 Net cash provided by (used in) financing activities 181,406 (6,667) (4,440) Effect of exchange rate fluctuations on cash and cash equivalents1,356296(828) Increase (decrease) in cash and cash equivalents 200,556 8,871 (4,820)Cash and cash equivalents - beginning of year 31,748 22,877 27,697 Cash and cash equivalents - end of year $232,304 $31,748 $22,877 Supplemental disclosure of non-cash activities: Operating right-of-use assets recognized with corresponding operating lease liabilities $2,367 $31,465 - Supplemental disclosure of cash flow information: Cash paid during the year for income taxes $3,981 $8,342 $13,048 The accompanying notes are an integral part of the consolidated financial statements.F - 10NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 1  -  GENERALBusiness Description:Nova Measuring Instruments Ltd. (“Nova” or the “Parent Company”) was incorporated and commenced operations in 1993 in the design,development and production of process control systems, used in the manufacturing of semiconductors. Nova has wholly owned subsidiariesin the United States of America (the “U.S.”), Japan, Taiwan, Korea and Germany (together defined as the “Company”).The Company continues research and development for the next generation of its products and additional applications for such products. TheCompany operates in one operating segment.On April 2, 2015, the Company completed the acquisition of 100% shares of ReVera Inc. (hereinafter – ReVera) a privately-held U.S.company. On December 31, 2017, ReVera, merged into Nova Measuring Instruments, Inc.The ordinary shares of the Company are traded on the NASDAQ Global Market since April 2000 and on the Tel-Aviv Stock Exchangesince June 2002.NOTE 2  -  SIGNIFICANT ACCOUNTING POLICIESThe Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles(“GAAP”) in the United States of America.The following is a summary of the significant accounting policies, which were applied in the preparation of these financial statements, on aconsistent basis:A.Principles of Consolidation and Basis of PresentationThe Company’s consolidated financial statements include the financial statements of Nova Measuring Instruments Ltd. and its whollyowned subsidiaries. All intercompany balances and transactions have been eliminated.B.Use of Estimates in the Preparation of Financial StatementsThe preparation of financial statements in conformity with generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as ofthe date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The Company'smanagement evaluates its estimates on an ongoing basis, including those related to, but not limited to income taxes and tax uncertainties,collectability of trade accounts receivable, inventory accruals, fair value and useful lives of intangible assets, lease discount rate, leaseperiod, convertible senior notes borrowing rate and revenue recognition. These estimates are based on management's knowledge aboutcurrent events and expectations about actions the Company may undertake in the future. Actual results could differ from those estimates.The novel coronavirus (“COVID-19”) pandemic has created, and may continue to create, significant uncertainty in macroeconomicconditions, and the extent of its impact on the Company’s operational and financial performance will depend on certain developments,including the duration and spread of the outbreak and the impact on the Company’s customers and its sales cycles. The Companyconsidered the impact of COVID-19 on the estimates and assumptions and determined that there were no material adverse impacts on theconsolidated financial statements for the period ended December 31, 2020. As events continue to evolve and additional informationbecomes available, the Company’s estimates and assumptions may change materially in future periods.F - 11NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 2  -  SIGNIFICANT ACCOUNTING POLICIES (Cont.)C.Financial Statements in U.S. DollarsThe currency of the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the U.S.dollar (the “dollar”). Accordingly, the Company uses the dollar as its functional and reporting currency. Certain of the dollar amounts in thefinancial statements may represent the dollar equivalent of other currencies, including the New Israeli Shekel (“NIS”). Transactions andbalances denominated in dollars are presented at their dollar amounts. Non-dollar transactions and balances are re-measured into dollars inaccordance with the principles set forth in ASC 830, “Foreign Currency Translation”.All transaction gains and losses of the re-measured monetary balance sheet items are reflected in the statements of operations as financialincome or expenses, as appropriate.D.Cash and Cash EquivalentsCash and cash equivalents represent short-term highly liquid investments (mainly interest-bearing deposits) with maturity dates notexceeding three months from the date of deposit.E.Short Term Bank DepositShort-term bank deposits consist of bank deposits with original maturities of more than three months and up to twelve months.F.Trade accounts receivablesTrade accounts receivables are recorded and carried at the original invoiced amount less an allowance for any potential uncollectibleamounts. The Company makes estimates of expected credit losses for based upon its assessment of various factors, including historicalexperience, the age of the trade receivable balances, credit quality of its customers, current economic conditions, reasonable andsupportable forecasts of future economic conditions, and other factors that may affect its ability to collect from customers. The Companyhas adopted ASC 326 as of January 1, 2020. Prior to the adoption of ASC 326, the Company evaluated its outstanding accounts receivableand established an allowance for doubtful accounts according to specific identification basis, based on information available on the relevantcustomer credit condition, current aging, historical experience and based on Company policy.G.Business CombinationThe Company accounts for business combination in accordance with ASC No, 805, “Business Combination” (ASC 805). ASC 805 requiresrecognition of assets acquired and liabilities assumed at the acquisition date, measured at their fair values as of that date. Any access of thefair value of net assets acquired over purchased price and any subsequent changes in estimated contingencies are to be recorded in theconsolidated statements of operations.H.InventoriesInventories are stated at the lower of cost or net realizable value. Inventory write-downs are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories, discontinued products, and for market prices lower than cost, if any. TheCompany periodically evaluates the quantities on hand relative to historical and projected sales volume (which is determined based on anassumption of future demand and market conditions), the age of the inventory and the expected consumption of service spare parts. At thepoint of the loss recognition, a new lower cost basis for that inventory is established. Any adjustments to reduce the cost of inventories totheir net realizable value are recognized in earnings in the current period.Inventory includes costs of products delivered to customers and not recognized as cost of sales, where revenues in the related arrangementswere not recognized.To support the Company’s service operations, the Company maintains service spare parts inventory and reduce the net carrying value of thisinventory over the service life.F - 12NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 2  -  SIGNIFICANT ACCOUNTING POLICIES (Cont.)Cost is determined as follows:•Raw materials – based on the moving average cost method.•Service inventory, work in process and finished goods - based on actual production cost basis (materials, labor and indirectmanufacturing costs).I.Property and EquipmentProperty and equipment are presented at cost, net of accumulated depreciation. Annual depreciation is calculated based on the straight-linemethod over the estimated useful lives of the related assets. Estimated useful life is as follows:Years Electronic equipment3-7Office furniture and equipment7-17Leasehold improvementsOver the shorter of the term of the lease(including its extension periods) or theuseful life of the assetDepreciation methods, useful lives and residual values are reviewed at the end each reporting year and adjusted if appropriate.J.Goodwill and Intangible AssetsGoodwill and other purchased intangible assets have been recorded as a result of the acquisition of ReVera. Goodwill represents the excessof the purchase price in a business combination over the fair value of net tangible and intangible assets acquired, and related liabilities.Goodwill is not amortized, but rather is subject to an impairment test, in accordance with ASC 350, “Intangibles – Goodwill and Other”, atleast annually (in the fourth quarter), or more frequently if events or changes in circumstances indicate that the carrying value may beimpaired. The Company has an option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair valueof a reporting unit is less than its carrying value prior to performing the quantitative goodwill impairment test. The Company operates inone operating segment, and this segment comprises its only reporting unit.Following the adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment", any excess of the carrying value of the reportingunit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to the fair value of thereporting unit.Intangible assets with finite life (refer to note 2T for impairment assessment of Intangible assets with finite life) are amortized over theiruseful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used,or, if that pattern cannot be reliably determined, using a straight-line amortization method.Weighted Average Useful Life (Years)Technology7Customer relationships10IPR&D(*)(*) To be determined upon completion of the development and successful launch of the related product, subject to annual impairmentassessment.F - 13NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 2  -  SIGNIFICANT ACCOUNTING POLICIES (Cont.)IPR&D is tested for impairment annually or more frequently when indicators of impairment exist. The Company first assesses qualitativefactors to determine if it is more likely than not that the IPR&D is impaired and whether it is necessary to perform a quantitativeimpairment test. The qualitative assessment considers various factors, including changes in demand, the abandonment of the IPR&D orsignificant economic slowdowns in the semiconductor industry and macroeconomic environment. If adverse qualitative trends are identifiedthat could negatively impact the fair value of the asset, then quantitative impairment test is performed to compare the carrying value of theasset to its undiscounted expected future cash flows.If this test indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using discountedexpected future cash flows utilizing an appropriate discount rate.No impairment losses have been identified during 2020, 2019 and 2018 relating to goodwill and IPR&D.K.Accrued Warranty CostsAccrued warranty costs are calculated with respect to the warranty period on the Company’s products and are based on the Company’s priorexperience and in accordance with management’s estimate. The estimated future warranty obligations are affected by the warranty periods,install base, labor and other related costs incurred in correcting a product failure.L.Revenue RecognitionRevenue Recognition PolicyThe Company enters into revenue arrangements that include products and services which are distinct and accounted for as separateperformance obligations. The Company determines whether promises are distinct based on whether the customer can benefit from theproduct or service on its own or together with other resources that are readily available and whether the Company's commitment to transferthe product or service to the customer is separately identifiable from other obligations in the contract.The company derives revenue from sales of advanced process control systems, spare parts, labor hours (mainly related to installation) andservice contracts.Revenues derived from sales of advanced process control systems, spare parts and labor hours are recognized at a point in time, whencontrol of the promised goods or services is transferred to the customers, upon fulfillment of the contractual terms (typically upon shipmentof the systems and spare parts or when the service is completed for labor hours).Revenues derived from service contracts, are recognized ratably over time in accordance with the term of the contract since the Companyhas a stand-ready obligation to provide the service. Such contracts generally include a fixed fee.Revenues from sales which were not yet determined to be final sales due to certain acceptance provisions are deferred.Significant Judgments - Contracts with Multiple Performance ObligationsContracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to eachperformance obligation based on its relative Standalone Selling Price (“SSP”). Judgment is required to determine the SSP for each distinctperformance obligation. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separatelyand needs to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.F - 14NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 2  -  SIGNIFICANT ACCOUNTING POLICIES (Cont.)Remaining Performance ObligationsRemaining performance obligations (RPOs) represent contracted revenues that had not yet been recognized and include deferred revenuesand invoices that have been issued to customers but were uncollected and have not been recognized as revenues. As of December 31, 2020,the aggregate amount of the RPOs was $15,938 comprised of $4,717 deferred revenues and $11,221 of uncollected amounts that were notrecognized yet as revenues. As of December 31, 2019, the aggregate amount of the RPOs was $5,362 comprised of $2,256 deferredrevenues and $3,106 of uncollected amounts that were not recognized yet as revenues. The Company expects the RPO to be recognized asrevenues over the next year.Contract BalancesContract balances are presented separately on the consolidated balance sheets.Revenues recognized during 2020, 2019 and 2018 from deferred revenues amounts included in current liabilities at the beginning of theperiod amounted to $1,544 $3,481 and $10,218 respectively.In certain arrangements, the Company receives payment from a customer either before or after the performance obligation has beensatisfied. The expected timing difference between the payment and satisfaction of performance obligations for the Company’s contracts isone year or less; therefore, the Company applies a practical expedient and does not consider the effects of the time value of money.M.Research and DevelopmentResearch and development costs are charged to operations as incurred. Amounts received or receivable from the Government of Israelthrough the Israeli Innovation Authority (“IIA”, formerly known as the Office of the Chief Scientist) or from the European Community asparticipation in certain research and development programs are offset against research and development costs. The accrual for grantsreceivable is determined based on the terms of the programs, provided that the criteria for entitlement are expected to be met. Royaltyexpenses are determined based on actual revenues and presented in cost of revenues. Research and development grants recognized duringthe years ended December 31, 2020, 2019 and 2018 were $5,645, $6,932 and $5,763 respectively.N.Income TaxesThe Company accounts for income taxes utilizing the asset and liability method in accordance with ASC 740, “Income Taxes”. Current taxliabilities are recognized for the estimated taxes payable on tax returns for the current year. Deferred tax liabilities or assets are recognizedfor the estimated future tax effects attributable to temporary differences between the income tax bases of assets and liabilities and theirreported amounts in the financial statements, and for tax loss carryforwards.Measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax laws, and deferred tax assets arereduced, if necessary, by the amount of tax benefits, the realization of which is not considered more likely than not based on availableevidence.ASC 740-10 requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax positionfor recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustainedon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largestamount which is more than 50% likely of being realized upon ultimate settlement.F - 15NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 2  -  SIGNIFICANT ACCOUNTING POLICIES (Cont.)O.Share-Based CompensationThe Company accounts for equity-based compensation using ASC 718 “Compensation - Stock Compensation,” which requires companiesto recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant-date fair value ofthose awards.Share OptionsUnder ASC 718, the fair market value of each option grant is estimated on the date of grant using the “Black-Scholes option pricing”method with the following weighted-average assumptions: 2 0 2 0 2 0 1 9 2 0 1 8 Risk-free interest rate 0.38% 1.87% 2.79% Expected term of options 5.08 years 4.69 years 4.76 years Expected volatility 36.61% 33.18% 31.82% Expected dividend yield 0% 0% 0% Expected volatility was calculated based on actual historical share price movements over a term that is equivalent to the expected term ofgranted options. The expected term of options granted is based on historical experience and represents the period of time that optionsgranted are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term.The Company has historically not paid dividends and has no foreseeable plans to pay dividends.The Company recognizes compensation expenses for the value of awards granted, based on the accelerated method. The Company accountfor forfeitures as they occur.P.Earnings per ShareEarnings per share are presented in accordance with ASC 260-10, “Earnings per Share”. Pursuant to which, basic earnings per shareexcludes the dilutive effects of convertible securities and is computed by dividing income (loss) available to common shareholders by theweighted-average number of ordinary shares outstanding for the period, net of treasury shares. Diluted earnings per share reflect thepotential dilutive effect of options and RSUs. The number of potentially dilutive options and RSUs excluded from diluted earnings pershare due to the anti-dilutive effect of out of the money options amounted to 492,963 in 2020, 438,999 in 2019, 446,301 in 2018.Additionally, 2,680,965 shares underlying the conversion option of the Convertible Senior Notes are not considered in the calculation ofdiluted net income per share as the effect would be anti-dilutive. The Company intends to settle the principal amount of Convertible SeniorNotes in cash and therefore will use the treasury stock method for calculating any potential dilutive effect on diluted net income per share, ifapplicable. The conversion will have a dilutive impact on diluted net income per share when the average market price of an ordinary sharefor a given period exceeds the conversion price of $74.6 per share.Q.Concentrations of Credit RiskFinancial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents,bank deposits, trade accounts receivable and foreign currency derivative contracts.The majority of the Company’s cash and cash equivalents and bank deposits are invested in dollar instruments with major banks in Israel.Management believes that the financial institutions that hold the Company's investments are corporations with high credit standing.Accordingly, management believes that low credit risk exists with respect to these financial investments.F - 16NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 2  -  SIGNIFICANT ACCOUNTING POLICIES (Cont.)The trade accounts receivable of the Company are derived from sales to customers located primarily in Taiwan R.O.C., Korea, China andUSA. The management of the Company performed risk assessment on an ongoing basis and believes it bears low risk.The Company entered into options and forward contracts to hedge against the risk of overall changes in future cash flow from payments ofpayroll and related expenses as well as other expenses denominated in NIS. The derivative instruments hedge a portion of the Company'snon-dollar currency exposure. Counterparty to the Company’s derivative instruments is major financial institution.R.Fair Value MeasurementsThe fair values of the Company’s cash and cash equivalents, short-term interest-bearing bank deposits, trade accounts receivable, andaccounts payable approximate their carrying amounts due to their short-term nature.The Company follows the provisions of ASC No. 820, “Fair Value Measurement” (“ASC 820”), which defines fair value as the price thatwould be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurementdate.In determining a fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuringfair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observableinputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, based onmarket data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions that marketparticipants would use in pricing an asset or liability, based on the best information available under given circumstances.The hierarchy is broken down into three levels, based on the observability of inputs and assumptions, as follows:Level 1 - Observable inputs obtained from independent sources, such as quoted prices for identical assets and liabilities in active markets.Level 2 - Other inputs that are directly or indirectly observable in the market place.Level 3 - Unobservable inputs which are supported by little or no market activity.The estimated fair values of the derivative instruments are determined based on market rates to settle the instruments. The fair value of theCompany’s derivative contracts (including forwards and options) is determined using standard valuation models. The significant inputsused in these models are readily available in public markets or can be derived from observable market transactions and, therefore, theCompany’s derivative contracts have been classified as Level 2.Inputs used in these standard valuation models include the applicable spot, forward, and discount rates. The standard valuation model forthe Company options contracts also includes implied volatility, which is specific to individual options and is based on rates quoted from awidely used third-party resource.The Company’s cash and cash equivalents, Interest-bearing bank deposits and restricted interest-bearing bank deposits are classified withinlevel 1. Derivative instruments and Convertible senior notes classified within Level 2 (see Note 13 and Note 16, respectively).F - 17NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 2  -  SIGNIFICANT ACCOUNTING POLICIES (Cont.)S.Derivative Financial InstrumentsASC 815 requires the presentation of all derivatives as either assets or liabilities on the balance sheet and the measurement of thoseinstruments at fair value.For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected futurecash flows that is attributable to a particular risk), the gain or loss on the derivative instrument is reported as a component of othercomprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.See Note 13 for disclosure of the derivative financial instruments in accordance with such pronouncements.T.Impairment of Long-Lived AssetsLong-lived assets (tangible and intangible assets with finite life), held and used by the Company are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of the assets (or asset Group) may not be recoverable. In the event thatthe sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carryingamount of such assets, an impairment charge would be recognized, and the assets (or asset Group) would be written down to their estimatedfair values. During the years 2020, 2019 and 2018, no impairment losses have been identified.U.LeasesUnder ASC 842, a contract is or contains a lease when the Company has the right to control the use of an identified asset for a period oftime. The Company determines if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contractare agreed to, and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessormakes an underlying asset available for the Company’s use. On the commencement date leases are evaluated for classification and assetsand liabilities are recognized based on the present value of lease payments over the lease term.The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that theoption will be exercised. The right-of-use (“ROU”) asset is initially measured as the amount of lease liability, adjusted for any initial leasecosts, prepaid lease payments and any lease incentives. Costs incurred for common area maintenance, real estate taxes, and insurance arenot included in the lease liability and are recognized as they are incurred.The Company’s leases include office buildings for its facilities and car leases in Israel, which are all classified as operating leases. Certainlease agreements include rental payments that are adjusted periodically for the consumer price index (“CPI”). The ROU and lease liabilitywere calculated using the CPI as of the adoption date and will not be subsequently adjusted. Certain leases include renewal options that areunder the Company’s sole discretion. The renewal options were included in the ROU and liability calculation if it was reasonably assuredthat the Company will exercise the option.As the Company’s lease arrangements do not provide an implicit rate, the Company uses its incremental estimated borrowing rate at leasecommencement to measure ROU assets and lease liabilities. Operating lease expense is generally recognized on a straight-line basis overthe lease term. For leases with a term of one year or less, the Company elected not to record the ROU asset or liability.F - 18NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 2  -  SIGNIFICANT ACCOUNTING POLICIES (Cont.)V.Convertible senior notesThe Company accounts for its convertible senior notes in accordance with ASC 470-20 "Debt with Conversion and Other Options".Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that may be settled wholly or partiallyin cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of theinstrument. The liability component at issuance is recognized at fair value, based on the fair value of a similar instrument of similar creditrating and maturity that does not have a conversion feature. The equity component is based on the excess of the principal amount of theconvertible senior notes over the fair value of the liability component and is recorded in additional paid-in capital. The equity component,net of issuance costs and deferred tax effects is presented within additional paid-in-capital and is not remeasured as long as it continues tomeet the conditions for equity classification. The difference between the principal amount and the liability component represents a debtdiscount that is amortized to financial expense over the respective terms of the Notes using an effective interest rate method. The Companyallocated the total issuance costs incurred to the liability and equity components of the convertible senior notes based on their relativevalues.Issuance costs attributable to the liability and equity components were $5,894 and $518, respectively. Issuance costs attributable to theliability are netted against the principal balance and will be amortized to financial expense using the effective interest method over thecontractual term of the notes. The effective borrowing rate of the liability component of the notes (after deduction of the abovementionedissuance costs attributed to the liability component) is 2.365%. This borrowing rate was based on Company's synthetic credit risk rating.W.New Accounting PronouncementsRecently adoptedIn June 2016, the Financial Accounting Standards Board (“FASB”) issued amendment ASU 2016-13 “Financial Instruments – CreditLosses” (ASC 326). This update requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presentedat the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized costbasis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases ordecreases of expected credit losses that have taken place during the period.The measurement of expected credit losses is based on relevant information about past events, including historical experience, currentconditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment indetermining the relevant information and estimation methods that are appropriate in its circumstances.On January 1, 2020, the Company adopted ASU 2016-13 , using the modified retrospective transition method. The cumulative effectadjustment from adoption was immaterial to our condensed consolidated financial statements. We continue to monitor the financialimplications of the COVID-19 pandemic on expected credit losses.F - 19NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 2  -  SIGNIFICANT ACCOUNTING POLICIES (Cont.)In May 2019, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for GoodwillImpairment” which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairmentcharge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to thatreporting unit. The Company adopted ASU 2017-04 as of January 1, 2020 with no material impact on its consolidated financial statements.Recently issued accounting pronouncements not yet adopted:In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments andContracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristicsof liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This guidance also eliminates thetreasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method.This guidance will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.Early adoption is not permitted before fiscal years beginning after December 15, 2020. The Company is currently assessing the impact ofthe adoption of this standard on its consolidated financial statements.X.Certain prior period amounts have been reclassified to conform to the current period presentation.NOTE 3  -  INVENTORIESA.Composition: As of December 31, 2 0 2 0 2 0 1 9 Raw materials $17,511 $14,428 Service inventory16,86012,887Work in process 16,364 12,944 Finished goods 10,999 8,103 $61,734 $48,362 B.In the years ended December 31, 2020, 2019 and 2018, the Company wrote down inventories in a total amount of $5,664, $4,435 and$4,635, respectively.NOTE 4  -  OTHER CURRENT ASSETSAs of December 31,2 0 2 02 0 1 9Governmental institutions$5,776$13,979Prepaid expenses3,3311,834Other675872 $9,782$16,685F - 20NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 5  -  PROPERTY AND EQUIPMENT, NET As of December 31, 2 0 2 0 2 0 1 9 Cost: Electronic equipment $44,149 $38,432 Office furniture and equipment 4,525 4,353 Leasehold improvements 27,678 25,330 $76,352 $68,115 Accumulated depreciation: Electronic equipment $32,019 $28,835 Office furniture and equipment 1,554 1,431 Leasehold improvements 8,611 7,283 42,184 37,549 Net book value $34,168 $30,566 Depreciation expenses amounted to $5,875, $5,401 and $5,071 for the years ended December 31, 2020, 2019 and 2018, respectively.NOTE 6  -  INTANGIBLE ASSETSIntangible assets originated from the acquisition of ReVera on April 2, 2015. The following is a summary of intangible assets as ofDecember 31, 2020 and 2019: As of December 31, 2 0 2 0 2 0 1 9 Original amount: Technology $12,305 $12,305 Customer relationships 5,191 5,191 IPR&D 1,927 1,927 19,423 19,423 Accumulated amortization: Technology 10,108 8,350 Customer relationships 4,256 3,511 IPR&D - - 14,364 11,861 Net book value $5,059 $7,562 Amortization expenses amounted are as follows:Year ended December 31,2 0 2 02 0 1 92 0 1 8 Technology$1,758$1,758$1,759Customer relationships745867854$2,503$2,625$2,613F - 21NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 6  -  INTANGIBLE ASSETS (Cont.)Annual amortization expenses (excluding IPR&D) are expected as follows:Year ending December 31,2021$2,2972022736202384202415$3,132NOTE 7  -  OTHER CURRENT LIABILITIESA.Consists of: As of December 31, 2 0 2 0 2 0 1 9 Accrued salaries and fringe benefits $17,773 $11,015 Accrued warranty costs (See B below) 4,839 4,939 Governmental institutions 5,758 4,193 Other 48 346 $28,418 $20,493 B.Accrued Warranty Costs:The Company provides standard warranty coverage on its systems. Parts and labor are covered under the terms of the warranty agreement.The Company accounts for the estimated warranty cost as a charge to costs of revenues when revenue is recognized.Accrued warranty costs presented in:As of December 31,2 0 2 02 0 1 9 Other current liabilities$4,839$4,939Other long-term liability313193$5,152$5,132F - 22NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 7  -  OTHER CURRENT LIABILITIES (Cont.)The following table provides the changes in the product warranty accrual for the fiscal years ended December 31, 2020 and 2019: As of December 31, 2 0 2 0 2 0 1 9 Balance as of beginning of year $5,132 $5,622 Services provided under warranty (6,752) (6,759)Changes in provision 6,772 6,269 Balance as of end of year $5,152 $5,132 NOTE 8  -  LIABILITY FOR EMPLOYEE SEVERANCE PAY, NETIsraeli law and labor agreements determine the obligations of the Company to make severance payments to dismissed employees and toemployees leaving employment under certain other circumstances. The obligation for severance pay benefits, as determined by Israeli law,is based upon length of service and the employee’s most recent salary. The liability is partially covered through insurance policiespurchased by the Company and deposits in a severance fund.The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon thefulfillment of the obligation pursuant to Israel's Severance Pay Law, 1963 or labor agreements.Since July 2008, the Company's agreements with new Israeli employees are under Section 14 of the Israeli Severance Pay Law, 1963. TheCompany's contributions for severance pay have replaced its severance obligation.Upon contribution of the full amount of the employee's monthly salary for each year of service, no additional calculations are conductedbetween the parties regarding the matter of severance pay and no additional payments are made by the Company to the employee.Labor agreements in Taiwan determine the obligations of the Company to make severance payments to dismissed employees and toemployees leaving employment under certain other circumstances. The obligation for severance pay benefits is based upon length of serviceand the employee’s average salary.Severance pay expenses for the years ended December 31, 2020, 2019 and 2018, amounted to $285, $222 and $73, respectively (excludingthe Company’s contributions for severance pay under section 14).NOTE 9  -  COMMITMENTS AND CONTINGENCIESThe Company is obligated under certain agreements with its suppliers to purchase specified items of inventory which are expected to beutilized during the years 2021-2023. As of December 31, 2020, non-cancelable purchase obligations were approximately $41,027.NOTE 10  -  SHAREHOLDERS’ EQUITYA.Rights of Shares:Holders of ordinary shares are entitled to participate equally in the payment of cash dividends and bonus shares (stock dividends) and, inthe event of the liquidation of the Company, in the distribution of assets after satisfaction of liabilities to creditors. Each ordinary share isentitled to one vote on all matters to be voted on by shareholders.B.Share Repurchase:On November 1, 2018, the Company announced $25,000 share repurchase program. In this framework, through December 31, 2020, theCompany repurchased 556,603 ordinary shares for an aggregate amount of $14,509.On October 11, 2020, as part of the authorization of the Senior Convertible Notes Offering (see note 16), the Company’s board of directorsapproved and authorized a share repurchase for an aggregate amount of up to $20,000. In this framework, on October 13, 2020, theCompany repurchased 170,910 ordinary shares for an aggregate amount of $10,000.All treasury shares have been canceled as of the end of each respective year.C.Equity Based Incentive Plans:The Company’s Board of directors approves, from time to time, equity-based incentive plans, the last of which was approved in August2017. Equity-based incentive plans include stock options, restricted share units and restricted stock awards to employees, officers anddirectors.F - 23NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 10  -  SHAREHOLDERS’ EQUITY (Cont.)Share-based compensationThe following table summarizes the effects of share-based compensation resulting from the application of ASC 718 included in theStatements of Operations as follows: Year ended December 31, 2 0 2 0 2 0 1 9 2 0 1 8 Cost of Revenues: Product 927 534 515 Service 437 469 414 Research and Development 2,556 2,206 1,710 Sales and Marketing 1,531 1,121 1,026 General and Administrative 1,498 762 661 Total $6,949 $5,092 $4,326 As of December 31, 2020, there was $1,151 of total unrecognized compensation cost related to non-vested employee options and $12,061of total unrecognized compensation cost related to non-vested employee RSUs. These costs are generally expected to be recognized over aperiod of four years.Shares OptionsShare options vest over four years and their contractual term may not exceed 10 years. The exercise price is the market price at the date ofeach grant.The weighted average fair value (in dollars) of the options granted during 2020, 2019 and 2018, according to Black-Scholes option-pricingmodel, amounted to $15.46, $8.18 and $8.37 per option, respectively.Summary of the status of the Company’s share option plans as of December 31, 2020, as well as changes during the year then ended, ispresented below: 2 0 2 0 Share Options WeightedAverageExercise Price Outstanding - beginning of year 1,219,909 19.57 Granted 38,001 47.33 Exercised (302,730) 15.19 Expired and forfeited (157,901) 20.88 Outstanding - year end 797,279 22.29 Options exercisable at year end 462,094 17.74 The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's closing share market price on thelast trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been receivedby the option holders had all option holders exercised their options on the last trading day of the fiscal year. This amount changes based onthe fair market value of the Company's shares.The total intrinsic value of options outstanding as of December 31, 2020 and 2019 was $38,514 and $22,279, respectively. The totalintrinsic value of options exercisable as of December 31, 2020 and 2019 was $24,428 and $14,867, respectively. The total intrinsic value ofoptions exercised during the years 2020, 2019 and 2018 was $10,463, $4,570 and $2,170 respectively.F - 24NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 10  -  SHAREHOLDERS’ EQUITY (Cont.)The following table summarizes information about share options outstanding as of December 31, 2020:Range of ExercisePrices NumberOutstanding Weighted AverageRemainingContractual Life Weighted AverageExercise Price NumberExercisable Weighted AverageExercise Price (US dollars) (in years) (US dollars) (US dollars) 10.08-20.00 272,552 1.94 11.49 271,718 11.48 20.01-35.00 486,726 4.55 26.39 190,376 26.66 35.01-50.00 32,270 6.43 45.92 - - 50.01-60.915,731 6.65 55.23 - - 797,279 22.29 462,094 17.74 Restricted Share UnitsRestricted Share Units (“RSU”) grants are rights to receive shares of the Company's common stock on a one-for-one basis and vest 25% oneach of the first, second, third and fourth anniversaries of the grant date and are not entitled to dividends or voting rights, if any, until theyare vested. The fair value of such RSU grants is being recognized based on the accelerated method over the vesting period. Performancebased RSU grants vest over a period of 3 years and are subject to certain performance criteria; accordingly, compensation expense isrecognized for such awards when it becomes probable that the related performance condition will be satisfied. Number ofRSUs Weightedaverage grantdate fair value(USD) Unvested at January 1, 2020 387,218 26.91 Granted 214,687 52.47 Vested (119,281) 24.73 Canceled (14,063) 28.38 Unvested at December 31, 2020 468,561 39.14 The total intrinsic value of RSUs vested during the years 2020, 2019 and 2018 was $6,344, $3,513 and $1,048, respectively.F - 25NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 11  -   INCOME TAXESA.Income Tax Regulations (Rules on Bookkeeping by Foreign Invested Companies and Certain Partnerships and Determination oftheir Taxable Income), 1986:As a "Controlled Foreign Cooperation" (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company'smanagement has elected to apply Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies andCertain Partnerships and Determining Their Taxable Income)-1986. Accordingly, its taxable income or loss is calculated in US Dollars.B.Law for the Encouragement of Capital Investments-1959:Part of the Company’s investment in equipment has received approvals in accordance with the Law for the Encouragement of CapitalInvestments, 1959 (“Approved Enterprise” status) in three separate investment plans. The Company has chosen to receive its benefitsthrough the “Alternative Benefits” track, and, as such, is eligible for various benefits. These benefits include accelerated depreciation offixed assets used in the investment program, as well as a full tax exemption on undistributed income in relation to income derived from thefirst plan for a period of 4 years and for the second and third plans for a period of 2 years. Thereafter a reduced tax rate of 25% will beapplicable for an additional period of up to 3 years for the first plan and 5 years for the second and third plans, commencing with the dateon which taxable income is first earned but not later than certain dates. The benefit period of the second and third plan have commenced.On April 1, 2005, an amendment to the Investment Law came into effect (“the Amendment”) and has significantly changed the provisionsof the Investment Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteriafor the approval of a facility as a Privileged Enterprise, such as provisions generally requiring that at least 25% of the PrivilegedEnterprise’s Income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefitsare awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject tothe provisions of the law as they were on the date of such approval. Therefore, the Israeli companies with Approved Enterprise status willgenerally not be subject to the provisions of the Amendment.The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the above law, regulationspublished thereunder and the instruments of approval for the specific investments in "Approved Enterprises". In the event of failure tocomply with these conditions, the benefits may be canceled, and the Company may be required to refund the amount of the benefits, inwhole or in part, including interest.In the event of distribution by the Company of a cash dividend out of retained earnings that were tax exempt due to its Approved Enterprisestatus, the Company would have to pay corporate tax of 10% - 25% on the income from which the dividend was distributed based on theextent to which non-Israeli shareholders hold Company’s shares. A 15% withholding tax may be deducted from dividends distributed to therecipients.The Company has not provided deferred tax liability on future distributions of tax-exempt earnings, as the Company intends to reinvest anyincome derived from its Approved Enterprise program and not to distribute such income as a dividend. Accordingly, such earnings(amounting to $74,554 as of December 31, 2020) have been considered to be permanently reinvested. If these earnings will be distributed,they will be taxed at the applicable corporate tax rate of 25%.In 2008, the Company submitted a request to approve a new plan (fourth plan) as a Privileged Enterprise in accordance with theAmendment to the Investment Law. The commencing year was 2010. The expected expiration year is 2021.F - 26NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 11  -   INCOME TAXES (Cont.)In 2011, new legislation amending to the Investment Law was adopted. Under this new legislation, a uniform corporate tax rate will applyto all qualifying income of certain Industrial Companies (Requirement of a minimum export of 25% of the company's total turnover), asopposed to the current law's incentives, which are limited to income from Approved Enterprises during their benefits period. Under the newlaw, the uniform tax rate will be 10% in areas in Israel designated as Development Zone A and 15% elsewhere in Israel during 2011-2012,7% and 12.5%, respectively, in 2013-2014, and 6% and 12%, respectively thereafter. The profits of these Industrial Companies will befreely distributable as dividends, subject to a 15% withholding tax (or lower, under an applicable tax treaty).Under the transition provisions of the new legislation, the Company may decide to irrevocably implement the new law while waivingbenefits provided under the current law or to remain subject to the current law.In August 2013 "The Arrangements Law" (hereinafter—"the Law") was officially published. The following significant changes affectingtaxation were approved:1.The tax rate on a company in Development area A, effective January 1, 2014 is 9% (instead of 7% in 2014 and 6% in 2015 andthereafter), and the tax rate for companies in all other areas will be 16% (instead of 12.5% in 2014 and 12% in 2015 and thereafter).2.The tax rate on dividend distributed, generated from "preferred income" or by a company that has an approved enterprise increasedeffective January 1, 2014 from 15% to 20%.In 2016, most of the Company’s taxable income in Israel is attributable to Preferred Enterprises, with a related tax rate of 16%. In 2015 and2014, most of the Company’s taxable income in Israel is attributable to Approved Enterprise programs with zero tax.C.The New Technological Enterprise Incentives Regime - Amendment 73 to the Investment LawIn December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("the 2017 Amendment")was published. According to the 2017 Amendment, Technological preferred enterprise, as defined in the Law for the Encouragement ofCapital Investments, 1959 ("the Encouragement Law"), with total consolidated revenues of less than NIS 10 billion, shall be subject to 12%tax rate on income deriving from intellectual property (in development area A - a tax rate of 7.5%).Any dividends distributed deriving from income from the preferred technological enterprises will be subject to tax at a rate of 20%. The2017 Amendment further provides that, in certain circumstances, a dividend distributed to a foreign corporate shareholder, would be subjectto a 4% tax rate (if the percentage of foreign investors exceeds 90%).The Company assessed the criteria for qualifying to a “Preferred Technological Enterprise,” status and concluded that the Israeli entity isentitled to the above-mentioned benefits. The Company implemented the new incentives in its tax calculations starting 2017.D.The Tax Cuts and Jobs Act, 2017:On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “US Tax Act”) that instituted fundamental changes to the taxationof multinational corporations. The Tax Act includes significant changes to the U.S. corporate income tax system, including a Federalcorporate rate reduction from 35% to 21%, limitations on the deductibility of interest expense and executive compensation, the transition ofU.S. international taxation from a worldwide tax system to a territorial tax system, and foreign derived intangible income deduction.F - 27NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 11  -   INCOME TAXES (Cont.)Foreign-Derived Intangible Income:The 2017 Tax Act provides tax incentives to U.S. companies to earn income from the sale, lease or license of goods and services abroad inthe form of a deduction for foreign-derived intangible income (“FDII”). FDII is taxed at an effective rate of 13.1% for taxable yearsbeginning after December 31, 2017 and at an effective rate of 16.4% for taxable years beginning after December 31, 2025. The accountingfor the deduction for FDII is similar to a special deduction and should be accounted for based on the guidance in ASC 740-10-25-37. Thetax benefits for special deductions ordinarily are recognized no earlier than the year in which they are deductible on a tax return.E.Deferred Taxes:Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets are as follows: As of December 31, 2 0 2 0 2 0 1 9 Deferred tax assets: Net operating loss carryforwards $505 $513 Tax credits carryforward 740 794 Reserve and allowances 5,504 5,108 Operating lease liabilities, net344674Deferred tax assets before valuation allowance7,0937,089Valuation Allowance(1,311)(898)Deferred tax assets after valuation allowance5,7826,191Deferred tax liabilities:Convertible senior notes (1,804) - Intangible assets (1,109) (1,637)Deferred tax liabilities (2,913) (1,637)Deferred tax assets $2,869 $4,554 Long-term deferred tax assets: Year ended December 31, 2 0 2 0 2 0 1 9 Domestic $2,011 $3,742 Foreign858812 $2,869 $4,554 Under ASC 740-10, deferred tax assets are to be recognized for the anticipated tax benefits associated with net operating loss and tax creditscarry-forwards and deductible temporary differences; unless it is more-likely-than-not that some or all of the deferred tax assets will not berealized.F - 28NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 11  -   INCOME TAXES (Cont.)F.Income before taxes on income included in the consolidated statements of operations: Year ended December 31, 2 0 2 0 2 0 1 9 2 0 1 8 Domestic $42,164 $25,803 $41,013 Foreign (mainly US) 14,332 13,683 22,413 $56,496 $39,486 $63,426 G.Income tax expenses (tax benefits) included in the consolidated statements of operations: Year ended December 31, 2 0 2 0 2 0 1 9 2 0 1 8 Domestic $7,238 $4,482 $5,767 Foreign (mainly US) 1,351 (167) 3,284 $8,589 $4,315 $9,051 Current $9,620 $3,340 $10,793 Deferred (1,031) 975 (1,742) $8,589 $4,315 $9,051 H.Tax Reconciliation:The following is a reconciliation of the theoretical tax expense, assuming that all income is taxed at the ordinary statutory average corporatetax rate in Israel and the actual tax expense in the statement of operations, is as follows: Year ended December 31, 2 0 2 0 2 0 1 9 2 0 1 8 Net income before taxes $56,496 $39,486 $63,426 Statutory tax expenses 6,780 5,042 8,100 Effect of non-benefited income New Technological or Preferred Enterprises statusesin Israel 130 144 172 Permanent differences, including difference between the basis of measurement ofincome reported for tax purposes and the basis of measurement of income forfinancial reporting purposes, net (199) (131) 441 Change in tax reserve for uncertain tax positions 1,806 850 619 Effect of foreign operations taxed at various rates 1,381 1,173 2,034 Foreign Derived Intangible Income benefit (526) (768) (1,534)Tax credits (1,526) (777) (664)Adjustments for previous year’s tax 249 (2,121) (159)Change in valuation allowance413898-Other 81 5 42 1,809 (727) 951 Actual tax expenses $8,589 $4,315 $9,051 F - 29NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 11  -   INCOME TAXES (Cont.)I.Effective Tax Rates:The Company’s effective tax rates differ from the statutory rates applicable to the Company for tax year 2020, primarily due to tax creditsand foreign derived income benefit in the US.The Company’s effective tax rates differ from the statutory rates applicable to the Company for tax year 2019, primarily due to tax benefitsrelated to foreign derived income benefit, valuation allowance changes and adjustments for previous years tax, in the US.J.Tax Assessments:In 2017 the Parent Company has received final tax assessments for the years 2012-2015 from the Israeli Tax Authorities.For the US subsidiary, tax years starting 2015 and any tax attributes carryforwards from prior periods remain subject to examination infuture periods. The other subsidiaries received final tax assessments through tax years 2012 until 2016.K.Undistributed earnings of foreign subsidiaries:The Company considers the earnings of certain subsidiaries to be indefinitely invested outside Israel on the basis of estimates that futuredomestic cash generation will be sufficient to meet future domestic cash needs and the Company’s specific plans for reinvestment of thosesubsidiary earnings. The Company has not recorded a deferred tax liability of approximately $11,712 related to the Israel income taxes ofundistributed earnings of foreign subsidiaries indefinitely invested outside Israel. Should the Company decide to repatriate the foreignearnings, the Company would need to adjust the Company’s income tax provision in the period the Company determined that the earningswill no longer be indefinitely invested outside Israel.L.Uncertain Tax Positions:The taxation of the Company's business is subject to the application of multiple and sometimes conflicting tax laws and regulations as wellas multinational tax conventions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment anduncertainty.In addition, the Company classifies interest and penalties recognized in the financial statements relating to uncertain tax position under theincome taxes line item.Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation and the evolution of regulations andcourt rulings. Consequently, taxing authorities may impose tax assessments or judgments against the Company that could materially impactits tax liability and/or its effective income tax rate.The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. Thefinal tax outcome of its tax audits could be different from that which is reflected in the Company’s income tax provisions and accruals. Suchdifferences could have a material effect on the Company’s income tax provision and net income in the period in which such determinationis made.The following table summarizes the changes in uncertain tax positions: As of December 31, 2 0 2 0 2 0 1 9 Balance at the beginning of the year $7,738 $7,118 Increase (decrease) related to prior year tax positions, net 1,699 (519)Increase related to current year tax positions 1,643 1,139 Balance at the end of the year* $11,080 $7,738 F - 30NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 11  -   INCOME TAXES (Cont.)* The amount for the year ended December 31, 2020 and 2019 includes $2,280 and $2,120 unrecognized tax benefits, respectively, whichare presented as a reduction from deferred tax assets, see Note 11e.The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expenses.M.Income from Other Sources in Israel:Income not eligible for benefits under the New Technological Enterprise Laws mentioned in ”D” above are taxed at the corporate tax rate of23%.NOTE 12  -  GEOGRAPHIC AREAS AND MAJOR CUSTOMERSA.Sales by Geographic Area (as Percentage of Total Sales): Year ended December 31, 2 0 2 0 2 0 1 9 2 0 1 8 % % % Taiwan, R.O.C. 33 37 31 USA 23 25 18 China 19 18 18 Korea 17 9 21 Other 8 11 12 Total 100 100 100 Revenues are attributed to countries based on the geographic location of the customer.B.Sales by Major Customers (as Percentage of Total Sales): Year ended December 31, 2 0 2 0 2 0 1 9 2 0 1 8 % % % Customer A 26 27 20 Customer B 24 16 19 Customer C 8 13 14 C. Long-lived assets by geographic location:As of December 31, 2 0 2 02 0 1 9 %% Israel7580 US2019 Other51 Total long-lived assets (*)100100 (*) Long-lived assets are comprised of property and equipment, net and operating lease right-of-use assets.F - 31NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 13  -  FINANCIAL INSTRUMENTSA.Hedging ActivitiesThe Company enters into forward contracts, and currency options to hedge its balance sheet exposure as well as certain future cash flows inconnection with certain operating expenses (mainly payroll expense) and forecast transactions which are expected to be denominatedmainly in New Israeli Shekel ("NIS"). The Company is exposed to losses in the event of non-performance by counterparties to financialinstruments; however, as the counterparties are major Israeli banks, credit risk is considered immaterial. The Company does not hold orissue derivatives for trading purposes. The notional amounts of the hedging instruments as of December 31, 2020 and December 31, 2019were $17,675, and $16,174 respectively. The terms of all of these currency derivatives are less than one year.B.Derivative InstrumentsThe fair value of derivative contracts as of December 31, 2019 and December 31, 2018 was as follows: Derivative AssetsReported inOther Current Assets Derivative LiabilitiesReported inOther Current Liabilities December 31, December 31, 2 0 2 0 2 0 1 9 2 0 2 0 2 0 1 9 Derivatives designated as hedging instruments in cash flow hedge $ 644 $68 $- $- The impact of derivative instrument on total operating expenses in the year ended December 31, 2020, 2019 and 2018 was: Year ended December 31, 2 0 2 0 2 0 1 9 2 0 1 8 Loss (gain) on derivative instruments $796 $33 $(189)NOTE 14  -  LEASESThe Company has operating leases for facilities and vehicles. The Company recognized leased assets of $29,109 and corresponding currentliabilities of $3,703, and long-term liabilities of $31,905, as of December 31, 2020. The Company’s leases have remaining terms of 1 to 10years, some of which include options to extend the leases for up to additional 10 years. The weighted average remaining lease term was15.2 years (between 1 and 19 years), and the weighted average discount rate was 5.4% (between 0.9% and 6.6%) as of December 31, 2020.For the twelve months ended December 31, 2020, lease expenses were $4,654. The expected discounted and undiscounted lease paymentsunder non-cancelable leases as of December 31, 2020, excluding non-lease components, were as follows:Year 20213,781 20223,58820233,33220243,64320253,7142026 and thereafter35,924Total lease payments53,982Less imputed interest(18,374)Total$35,608Operating cash flows for operating leases for the year ended December 31, 2020 were $5,840.F - 32NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 15  -  FINANCING INCOME, NETYear ended December 31,2 0 2 02 0 1 92 0 1 8 Interest income4,0574,6053,352Financial expense related to the Convertible Senior Notes (Note 16)(868)--Exchange rate loss, net(2,172)(1,428)(281)Bank charges(91)(99)(87)Total$926$3,078$2,984NOTE 16  -  CONVERTIBLE SENIOR NOTES, NETIn October 2020, the Company issued $175,000 aggregate principal amount, 0% coupon rate, of convertible senior notes due 2025 and anadditional $25,000 aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option of the initialpurchasers (collectively, “Convertible Notes” or “Notes”).The Convertible Notes are convertible based upon an initial conversion rate of 13.4048 of the Company’s ordinary shares, par value NIS0.01 per share per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately $74.60 per ordinaryshare). The conversion rate will be subject to adjustment upon the occurrence of certain specified events. The Convertible Notes are seniorunsecured obligations of the Company.The Convertible Notes will mature on October 15, 2025, (the "Maturity Date"), unless earlier repurchased, redeemed or converted. Prior toJuly 15, 2025, a holder may convert all or a portion of its Convertible Notes only under the following circumstances:1.During any calendar quarter commencing after the calendar quarter ending on March 31, 2021 (and only during such calendar quarter),if the last reported sale price of the Company’s ordinary shares for at least 20 trading days (whether or not consecutive) during a periodof 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greaterthan or equal to 130% of the conversion price on each applicable trading day;2.During the five business day period after any 10 consecutive trading day period (“measurement period”) in which the trading price,determined pursuant to the terms of the Convertible Notes, per $1,000 principal amount of Convertible Notes for each trading day ofthe measurement period was less than 98% of the product of the last reported sale price of the ordinary shares and the conversion rateon each such trading day;3.If the Company calls such Convertible Notes for redemption in certain circumstances, at any time prior to the close of business on thesecond scheduled trading day immediately preceding the redemption date; or4.Upon the occurrence of specified corporate events.On or after July 15, 2025 until the close of business on the second scheduled trading day immediately preceding the Maturity Date, a holdermay convert its Convertible Notes at any time, regardless of the foregoing circumstances.Upon conversion, the Company can pay or deliver cash, ordinary shares or a combination of cash and ordinary shares, at the Company’selection.The Company may not redeem the notes prior to October 20, 2023, except in the event of certain tax law changes. The Company may, atany time and from time to time, redeem for cash all or any portion of the notes, at the Company's option, on or after October 20, 2023, if thelast reported sale price of the Company`s ordinary shares has been at least 130% of the conversion price then in effect for at least 20 tradingdays (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on,and including, the trading day immediately preceding the date on which it delivers notice of redemption at a redemption price equal to100% of the principal amount of the notes to be redeemed, (plus accrued and unpaid special interest (if any) to, but excluding, theredemption date).F - 33NOVA MEASURING INSTRUMENTS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share and per share data)NOTE 16  -  CONVERTIBLE SENIOR NOTES, NET (Cont.)Upon the occurrence of a Fundamental Change as defined in the Indenture, holders may require the Company to repurchase for cash all orany portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the ConvertibleNotes, (plus accrued and unpaid special interest payable under certain circumstances set forth in the terms of the Convertible Notes (if any)to, but excluding, the fundamental change repurchase date). In addition, in connection with a make-whole fundamental change (as definedin the Indenture), or following our delivery of a notice of redemption, the company will, in certain circumstances, increase the conversionrate for a holder who elects to convert its notes in connection with such a corporate event or redemption, as the case may be.During the year ended December 31, 2020, the conditions allowing holders of the Notes to convert were not met. The Notes are thereforenot convertible as of December 31, 2020 and are classified as long-term liability.The net carrying amount of the liability and equity components of the Convertible Notes as of December 31, 2020 is as follows:December 31,Liability component:2 0 2 0 Principal amount200,000Unamortized discount(15,032)Unamortized issuance costs(6,160)Net carrying amount178,808Equity component, net of issuance costs of $518 and deferred taxes of $1,87813,770Interest expense related to the Convertible Notes was as follows:Year endedDecember 31,2 0 2 0 Amortization of debt discount616Amortization of debt issuance costs252Total financial expense recognized868As of December 31, 2020, the total estimated fair value of the convertible senior notes was approximately $223,826. The fair value of theconvertible senior notes is considered to be Level 2 within the fair value hierarchy and wasdetermined based on quoted price of the convertible senior notes in an over-the-counter market.F - 34EXHIBIT INDEXNumberDescription1.1Amended and Restated Articles of Association (incorporated by reference to Exhibit 1.1 to the Company’s Annual Report on Form 20-F filedwith the Securities and Exchange Commission on March 12, 2020)2.1Description of Securities (incorporated by reference to Exhibit 2.1 to the Company’s Annual Report on Form 20-F filed with the Securitiesand Exchange Commission on March 12, 2020)4.22007 Incentive Plan, as amended (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 20-F filed with theSecurities and Exchange Commission on February 25, 2015)4.32017 Share Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed with theSecurities and Exchange Commission on August 25, 2017 (File No. 333-220158))4.4A form of amended Indemnification Letter Agreement between the Company and its present and future directors and officers (incorporatedby reference to Appendix B to Exhibit 99.1 of the Company’s Report on Form 6-K filed with the Securities and Exchange Commission onMay 21, 2012)4.5Summary of lease agreement dated May 28, 2000, as amended and supplemented on August 21, 2000, February 20, 2003, November 1, 2005,May 7, 2007, October 30, 2010, May 15, 2011, June 15, 2012, July 5, 2012, February 28, 2013, December 31, 2014, October 1, 2015 andMay 25, 2016 (incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 20-F filed with the Securities andExchange Commission on March 3, 2017)4.6Compensation Policy for Executive Officers and Directors (filed herewith).4.7+Summary of lease agreement dated May 3, 2018, by and between the Company and Bayside Land Corporation Ltd. (incorporated byreference to Exhibit 4.7 to the Company’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on February 28,2019).4.8+Summary of main contractor agreement dated February 3, 2019, by and between the Company and A. Weiss Construction and SupervisionLtd. (incorporated by reference to Exhibit 4.8 to the Company’s Annual Report on Form 20-F filed with the Securities and ExchangeCommission on February 28, 2019).8.1List of Subsidiaries (incorporated by reference to Exhibit 8.1 to the Company’s Annual Report on Form 20-F filed with the Securities andExchange Commission on February 28, 2019).12.1Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith).12.2Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith).13.1Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).13.2Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).15.1Consent of Kost Forer Gabbay & Kasierer (filed herewith).101.INSInline XBRL Instance Document—the instance document does not appear in the Interactive Data File as its XBRL tags are embedded withinthe Inline XBRL document101.SCHInline XBRL Taxonomy Extension Schema101.CALInline XBRL Taxonomy Extension Calculation Linkbase101.DEFInline XBRL Taxonomy Extension Definition Linkbase101.LABInline XBRL Taxonomy Extension Label Linkbase101.PREInline XBRL Taxonomy Extension Presentation Linkbase104Cover page formatted as Inline XBRL and contained in Exhibit 101100SIGNATURESThe registrant hereby certifies that it meets all of the requirements for filing on Form 20‑F and has duly caused and authorized the undersigned to signthis annual report on its behalf.NOVA MEASURING INSTRUMENTS LTD. By: /s/ Eitan OppenhaimEitan OppenhaimPresident and Chief Executive OfficerDate: March 1, 2021101Exhibit 4.6 COMPENSATION POLICYNOVA MEASURING INSTRUMENTS LTD. Compensation Policy for Executive Officers and Directors (As Amended on June 25, 2020)Table of Contents Page A. Overview and Objectives 3 B. Base Salary and Benefits 4 C. Cash Bonuses 6 D. Equity Based Compensation 8 E. Retirement and Termination of Service Arrangements 9 F. Exculpation, Indemnification and Insurance 10 G. Arrangements upon Change of Control 11 H. Board of Directors Compensation 11 I. Miscellaneous 122A. Overview and Objectives 1.Introduction This document sets forth the Compensation Policy for Executive Officers and Directors (this “Compensation Policy” or “Policy”) of Nova MeasuringInstruments Ltd. (“Nova” or the “Company”), in accordance with the requirements of the Companies Law, 5759-1999 (the “Companies Law”). Compensation is a key component of Nova’s overall human capital strategy to attract, retain, reward, and motivate highly skilled individuals that willenhance Nova’s value and otherwise assist Nova to reach its business and financial long-term goals. Accordingly, the structure of this Policy is establishedto tie the compensation of each officer to Nova’s goals and performance. For purposes of this Policy, “Executive Officers” shall mean “Office Holders” as such term is defined in Section 1 of the Companies Law, excluding,unless otherwise expressly indicated herein, Nova’s directors. This policy is subject to applicable law and is not intended, and should not be interpreted as limiting or derogating from, provisions of applicable law to theextent not permitted. This Policy shall apply to compensation agreements and arrangements which will be approved after the date on which this Policy is adopted and shall serveas Nova’s Compensation Policy for three (3) years, commencing as of its adoption. The Compensation Committee and the Board of Directors of Nova (the “Compensation Committee” and the “Board”, respectively) shall review andreassess the adequacy of this Policy from time to time, as required by the Companies Law. 2.Objectives Nova’s objectives and goals in setting this Policy are to attract, motivate and retain highly experienced leaders who will contribute to Nova’s success andenhance shareholder value, while demonstrating professionalism in a highly achievement-oriented culture that is based on merit and rewards excellentperformance in the long term, and embedding Nova’s core values as part of a motivated behavior. To that end, this Policy is designed, among others: 2.1.To closely align the interests of the Executive Officers with those of Nova’s shareholders in order to enhance shareholder value; 2.2.To align a significant portion of the Executive Officers’ compensation with Nova’s short and long-term goals and performance; 2.3.To provide the Executive Officers with a structured compensation package, including competitive salaries, performance-motivating cash and equityincentive programs and benefits, and to be able to present to each Executive Officer an opportunity to advance in a growing organization; 2.4.To strengthen the retention and the motivation of Executive Officers in the long term; 2.5.To provide appropriate awards in order to incentivize superior individual excellency and corporate performance; and 2.6.To maintain consistency in the way Executive Officers are compensated. 33.Compensation Instruments Compensation instruments under this Policy may include the following: 3.1.Base salary; 3.2.Benefits; 3.3.Cash bonuses; 3.4.Equity based compensation; and 3.5.Retirement and termination terms. 4.Overall Compensation - Ratio Between Fixed and Variable Compensation 4.1.This Policy aims to balance the mix of “Fixed Compensation” (comprised of base salary and benefits) and “Variable Compensation” (comprised ofcash bonuses and equity-based compensation) in order to, among other things, appropriately incentivize Executive Officers to meet Nova’s short-and long-term goals while taking into consideration the Company’s need to manage a variety of business risks. 4.2.The total annual bonus and equity-based compensation of each Executive Officer shall not exceed 90% of the total compensation package of suchExecutive Officer on an annual basis. 5.Inter-Company Compensation Ratio 5.1.In the process of drafting and updating this Policy, Nova’s Board and Compensation Committee have examined the ratio between employer costassociated with the engagement of the Executive Officers, including directors, and the average and median employer cost associated with theengagement of Nova’s other employees (including contractor employees as defined in the Companies Law) (the “Ratio”). 5.2.The possible ramifications of the Ratio on the daily working environment in Nova were examined and will continue to be examined by Nova fromtime to time in order to ensure that levels of executive compensation, as compared to the overall workforce will not have a negative impact on workrelations in Nova. B. Base Salary and Benefits 6.Base Salary 6.1.A base salary provides stable compensation to Executive Officers and allows Nova to attract and retain competent executive talent and maintain astable management team. The base salary varies among Executive Officers, and is individually determined according to the educationalbackground, prior vocational experience, qualifications, company’s role, business responsibilities and the past performance of each ExecutiveOfficer. 6.2.Since a competitive base salary is essential to Nova’s ability to attract and retain highly skilled professionals, Nova will seek to establish a basesalary that is competitive with base salaries paid to Executive Officers in a peer group of other companies operating in technology sectors whichare similar in their characteristics to Nova’s, as much as possible, while considering, among others, such companies’ size and characteristicsincluding their revenues, profitability rate, number of employees and operating arena (in Israel or globally), the list of which shall be reviewed andapproved by the Compensation Committee at least every two years. To that end, Nova shall utilize as a reference, comparative market data andpractices, which will include a compensation survey that compares and analyses the level of the overall compensation package offered to anExecutive Officer of the Company with compensation packages in similar positions to that of the relevant officer) in such companies. Suchcompensation survey may be conducted internally or through an external independent consultant. Information on such compensation survey shallbe included in the proxy statement published in connection with the annual general meeting of Nova’s shareholders. 46.3.The Compensation Committee and the Board may periodically consider and approve base salary adjustments for Executive Officers. The mainconsiderations for salary adjustment are similar to those used in initially determining the base salary, but may also include change of role orresponsibilities, recognition for professional achievements, regulatory or contractual requirements, budgetary constraints or market trends. TheCompensation Committee and the Board will also consider the previous and existing compensation arrangements of the Executive Officer whosebase salary is being considered for adjustment. 7.Benefits 7.1.The following benefits may be granted to the Executive Officers in order, among other things, to comply with legal requirements: 7.1.1.Vacation days in accordance with market practice; 7.1.2.Sick days in accordance with market practice; 7.1.3.Convalescence pay according to applicable law; 7.1.4.Monthly remuneration for a study fund, as allowed by applicable law and with reference to Nova’s practice and the practice in peer groupcompanies; 7.1.5.Nova shall contribute on behalf of the Executive Officer to an insurance policy or a pension fund, as allowed by applicable law and withreference to Nova’s policies and procedures and the practice in peer group companies; and 7.1.6.Nova shall contribute on behalf of the Executive Officer towards work disability insurance, as allowed by applicable law and withreference to Nova’s policies and procedures and to the practice in peer group companies. 7.2.Non-Israeli Executive Officers may receive other similar, comparable or customary benefits as applicable in the relevant jurisdiction in which theyare employed. Such customary benefits shall be determined based on the methods described in Section 6.2 of this Policy (with the necessarychanges). 7.3.In the event of relocation of an Executive Officer to another geography, such Executive Officer may receive other similar, comparable or customarybenefits as applicable in the relevant jurisdiction in which he or she is employed or additional payments to reflect adjustments in cost of living.Such benefits shall include reimbursement for out of pocket one-time payments and other ongoing expenses, such as housing allowance, carallowance, and home leave visit, etc. 7.4.Nova may offer additional benefits to its Executive Officers, which will be comparable to customary market practices, such as, but not limited to:cellular and land line phone benefits, company car and travel benefits, reimbursement of business travel including a daily stipend when travelingand other business related expenses, insurances, other benefits (such as newspaper subscriptions, academic and professional studies), etc., provided,however, that such additional benefits shall be determined in accordance with Nova’s policies and procedures. 5C. Cash Bonuses 8.Annual Cash Bonuses - The Objective 8.1.Compensation in the form of an annual cash bonus is an important element in aligning the Executive Officers’ compensation with Nova’sobjectives and business goals. Therefore, a pay-for-performance element, as payout eligibility and levels are determined based on actual financialand operational results, as well as individual performance. 8.2.An annual cash bonus may be awarded to Executive Officers upon the attainment of pre-set periodical objectives and individual targets determinedby the Compensation Committee (and, if required by law, by the Board) at the beginning of each calendar year, or upon engagement, in case ofnewly hired Executive Officers, taking into account Nova’s short and long-term goals, as well as its compliance and risk management policies. TheCompensation Committee and the Board shall also determine applicable minimum thresholds (based on annual budget revenue and/or positive non-GAAP operating income) that must be met for entitlement to the annual cash bonus (all or any portion thereof) and the formula for calculating anyannual cash bonus payout, with respect to each calendar year, for each Executive Officer. In special circumstances, as determined by theCompensation Committee and the Board (e.g., regulatory changes, significant changes in Nova’s business environment, a significant organizationalchange and a significant merger and acquisition events), the Compensation Committee and the Board may modify the objectives and/or theirrelative weights during the calendar year. 8.3.The total annual cash bonuses awarded to all of Nova’s Executive Officers shall not exceed 10% of Nova’s non-GAAP operating income. 8.4.In the event the employment of an Executive Officer is terminated prior to the end of a fiscal year, the Company may pay such Executive Officer afull annual cash bonus or a prorated one. Such bonus will become due on the same scheduled date for annual cash bonus payments by theCompany. 8.5.The actual annual cash bonus to be awarded to Executive Officers shall be approved by the Compensation Committee and the Board. 9.Annual Cash Bonuses - The Formula Executive Officers other than the CEO 9.1.The annual cash bonus of Nova’s Executive Officers, other than the chief executive officer (the “CEO”), will be based on performance objectivesand a discretionary evaluation of the Executive Officer’s overall performance by the CEO and subject to minimum thresholds. The performanceobjectives will be approved by Nova’s CEO at the commencement of each calendar year (or upon engagement, in case of newly hired ExecutiveOfficers or in special circumstances as indicated in Section 8.2 above) on the basis of, but not limited to, company, division and individualobjectives. The performance measurable objectives, which include the objectives and the weight to be assigned to each achievement in the overallevaluation, will be based on: 9.1.1.Overall company performance measures, which are based on actual financial and operational results, such as revenues, sales, operatingincome and cash flow. At least 30% of the annual cash bonus of Nova’s Executive Officers will be based on overall company performancemeasures; and 9.1.2.Divisional objectives which may include operational objectives, such as market share, initiation of new markets and products andoperational efficiency, customer focus objectives, such as system availability requirements and customer satisfaction, project milestonesobjectives, such as product implementation in production, product acceptance and new product penetration, and investment in humancapital objectives, such as employee satisfaction, employee retention and employee training and leadership programs. 69.2.Information on the CEO’s performance measurable objectives shall be included in the proxy statement published in connection with the annualgeneral meeting of Nova’s shareholders. 9.3.The target annual cash bonus that an Executive Officer, other than the CEO, will be entitled to receive for any given calendar year, will not exceed100% of such Executive Officer’s annual base salary. 9.4.The maximum annual cash bonus including for overachievement performance that an Executive Officer, other than the CEO, will be entitled toreceive for any given calendar year, will not exceed 150% of such Executive Officer’s annual base salary. CEO 9.5.The annual cash bonus of Nova’s CEO will be mainly based on performance measurable objectives and subject to minimum thresholds as providedin Section 8.2 above. Such performance measurable objectives will be determined annually by Nova’s Compensation Committee (and, if requiredby law, by Nova’s Board) at the commencement of each calendar year (or upon engagement, in case of newly hired CEO or in specialcircumstances as indicated in Section 8.2 above) on the basis of, but not limited to, company and personal objectives. These performancemeasurable objectives, which include the objectives and the weight to be assigned to each achievement in the overall evaluation, will becategorized as described below: 9.5.1.Between 40%-60% will be based on overall company performance measures, which are based on actual financial and operational results,such as revenues, sales, operating income and cash flow; and 9.5.2.Between 20%-50% will be based on goals set forth in the Company’s annual operating plan and long-term plan, such as expansion of theCompany’s organic growth engines and achieving strategic technology objectives. 9.6.The less significant part of the annual cash bonus granted to Nova’s CEO, and in any event not more than 30% of the annual cash bonus, may bebased on a discretionary evaluation of the CEO’s overall performance by the Compensation Committee and the Board based on quantitative andqualitative criteria. 9.7.The target annual cash bonus that the CEO will be entitled to receive for any given calendar year, will not exceed 150% of his or her annual basesalary. 9.8.The maximum annual cash bonus including for overachievement performance that the CEO will be entitled to receive for any given calendar year,will not exceed 200% of his or her annual base salary. 10.Other Bonuses 10.1.Special Bonus. Nova may grant its Executive Officers a special bonus as an award for special achievements (such as in connection with mergersand acquisitions, offerings, achieving target budget or business plan under exceptional circumstances or special recognition in case of retirement) atthe CEO’s discretion (and in the CEO’s case, at the Board’s discretion), subject to any additional approval as may be required by the CompaniesLaw (the “Special Bonus”). The Special Bonus will not exceed 30% of the Executive Officer’s total compensation package on an annual basis. 710.2.Signing Bonus. Nova may grant a newly recruited Executive Officer a signing bonus at the CEO’s discretion (and in the CEO’s case, at the Board’sdiscretion), subject to any additional approval as may be required by the Companies Law (the “Signing Bonus”). The Signing Bonus will notexceed three (3) monthly entry base salaries of the Executive Officer. 10.3.Relocation Bonus. Nova may grant its Executive Officers a special bonus in the event of relocation of an Executive Officer to another geography(the “Relocation Bonus”). The Relocation bonus will include customary benefits associated with such relocation and its monetary value will notexceed 30% of the Executive Officer’s annual base salary. 11.Compensation Recovery (“Clawback”) 11.1.In the event of an accounting restatement, Nova shall be entitled to recover from its Executive Officers the bonus compensation or performance-based equity compensation in the amount in which such compensation exceeded what would have been paid under the financial statements, asrestated, provided that a claim is made by Nova prior to the second anniversary of fiscal year end of the restated financial statements. 11.2.Notwithstanding the aforesaid, the compensation recovery will not be triggered in the following events: 11.2.1.The financial restatement is required due to changes in the applicable financial reporting standards; or 11.2.2.The Compensation Committee has determined that Clawback proceedings in the specific case would be impossible, impractical ornot commercially or legally efficient. 11.3.Nothing in this Section 11 derogates from any other “Clawback” or similar provisions regarding disgorging of profits imposed on ExecutiveOfficers by virtue of applicable securities laws. D. Equity Based Compensation 12.The Objective 12.1.The equity-based compensation for Nova’s Executive Officers is designed in a manner consistent with the underlying objectives in determining thebase salary and the annual cash bonus, with its main objectives being to enhance the alignment between the Executive Officers’ interests with thelong-term interests of Nova and its shareholders, and to strengthen the retention and the motivation of Executive Officers in the long term. Inaddition, since equity-based awards are structured to vest over several years, their incentive value to recipients is aligned with longer-term strategicplans. 12.2.The equity-based compensation offered by Nova is intended to be in a form of share options and/or other equity based awards, such as RSUs, inaccordance with the Company’s equity incentive plan in place as may be updated from time to time. 12.3.Equity-based compensation awarded by the Company to employees, Executive Officers or directors shall not be, in the aggregate, in excess of 10%of the Company’s share capital on a fully diluted basis at the date of the grant. 12.4.All equity-based incentives granted to Executive Officers shall be subject to vesting periods in order to promote long-term retention of the awardedExecutive Officers. Unless determined otherwise in a specific award agreement approved by the Compensation Committee and the Board, grants toExecutive Officers other than directors shall vest gradually over a period of between three (3) to five (5) years or based on performance. Theexercise price of options shall be determined in accordance with Nova’s Equity-Based Compensation Policy, the main terms of which shall bedisclosed in the annual report of Nova. 812.5.All other terms of the equity awards shall be in accordance with Nova’s incentive plans and other related practices and policies. Accordingly, theBoard may, following approval by the Compensation Committee, extend the period of time for which an award is to remain exercisable and makeprovisions with respect to the acceleration of the vesting period of any Executive Officer’s awards, including, without limitation, in connectionwith a corporate transaction involving a change of control, subject to any additional approval as may be required by the Companies Law. 13.General Guidelines for the Grant of Awards 13.1.The equity-based compensation shall be granted from time to time and be individually determined and awarded according to the performance,educational background, prior business experience, qualifications, role and the personal responsibilities of the Executive Officer. 13.2.In determining the equity-based compensation granted to each Executive Officer, the Compensation Committee and Board shall consider thefactors specified in Section 13.1 above, and in any event the total fair market value of an annual equity-based compensation at the time of grantshall not exceed: (i) with respect to the CEO - 500% of the CEO’s annual base salary; and (ii) with respect to each of the other Executive Officers -300% of such Executive Officer’s annual base salary. 13.3.The fair market value of the equity-based compensation for the Executive Officers will be determined according to acceptable valuation practicesat the time of grant. E. Retirement and Termination of Service Arrangements 14.Advanced Notice Period Nova may provide an Executive Officer, other than the CEO, according to his/her seniority in the Company, his/her contribution to the Company’s goalsand achievements and the circumstances of retirement and the CEO a prior notice of termination of up to three (3) months, during which the ExecutiveOfficer may be entitled to all of the compensation elements, and to the continuation of vesting of his/her options. 15.Adjustment Period Nova may provide an additional adjustment period of up to nine (9) months to an Executive Officer, other than the CEO, according to his/her seniority inthe Company, his/her contribution to the Company’s goals and achievements and the circumstances of retirement and to the CEO, during which theExecutive Officer may be entitled to all of the compensation elements, and to the continuation of vesting of his/her options. 16.Additional Retirement and Termination Benefits Nova may provide additional retirement and terminations benefits and payments as may be required by applicable law (e.g., mandatory severance payunder Israeli labor laws), or which will be comparable to customary market practices. 17.Non-Compete Grant Upon termination of employment and subject to applicable law, Nova may grant to its Executive Officers a non-compete grant as an incentive to refrainfrom competing with Nova for a defined period of time. The terms and conditions of the non-compete grant shall be decided by the Board and shall notexceed such Executive Officer’s monthly base salary multiplied by twelve (12). 918.Limitation Retirement and Termination of Service Arrangements The total non-statutory payments under Section 14-17 above shall not exceed the Executive Officer’s monthly base salary multiplied by twenty-four (24). F. Exculpation, Indemnification and Insurance 19.Exculpation Nova may exempt its directors and Executive Officers in advance for all or any of his/her liability for damage in consequence of a breach of the duty ofcare vis-a-vis Nova, to the fullest extent permitted by applicable law. 20.Insurance and Indemnification 20.1.Nova may indemnify its directors and Executive Officers to the fullest extent permitted by applicable law, for any liability and expense that may beimposed on the director or the Executive Officer, as provided in the indemnity agreement between such individuals and Nova, all subject toapplicable law and the Company’s articles of association. 20.2.Nova will provide directors’ and officers’ liability insurance (the “Insurance Policy”) for its directors and Executive Officers as follows: 20.2.1.The annual premium to be paid by the Nova shall not exceed 9% of the aggregate coverage of the Insurance Policy; 20.2.2.The limit of liability of the insurer shall not exceed the greater of $50 million or 30% of the Company’s shareholders equity based onthe most recent financial statements of the Company at the time of approval by the Compensation Committee; and 20.2.3.The Insurance Policy, as well as the limit of liability and the premium for each extension or renewal shall be approved by theCompensation Committee (and, if required by law, by the Board) which shall determine that the sums are reasonable consideringNova’s exposures, the scope of coverage and the market conditions and that the Insurance Policy reflects the current marketconditions, and it shall not materially affect the Company’s profitability, assets or liabilities. 20.3.Upon circumstances to be approved by the Compensation Committee (and, if required by law, by the Board), Nova shall be entitled to enter into a“run off” Insurance Policy of up to seven (7) years, with the same insurer or any other insurance, as follows: 20.3.1.The limit of liability of the insurer shall not exceed the greater of $50 million or 30% of the Company’s shareholders equity based onthe most recent financial statements of the Company at the time of approval by the Compensation Committee; 20.3.2.The annual premium shall not exceed 300% of the last paid annual premium; and 20.3.3.The Insurance Policy, as well as the limit of liability and the premium for each extension or renewal shall be approved by theCompensation Committee (and, if required by law, by the Board) which shall determine that the sums are reasonable considering theCompany’s exposures covered under such policy, the scope of cover and the market conditions, and that the Insurance Policy reflectsthe current market conditions and that it shall not materially affect the Company’s profitability, assets or liabilities. 1020.4.Nova may extend the Insurance Policy in place to include cover for liability pursuant to a future public offering of securities as follows: 20.4.1.The additional premium for such extension of liability coverage shall not exceed 50% of the last paid annual premium; and 20.4.2.The Insurance Policy, as well as the additional premium shall be approved by the Compensation Committee (and if required by law,by the Board) which shall determine that the sums are reasonable considering the exposures pursuant to such public offering ofsecurities, the scope of cover and the market conditions and that the Insurance Policy reflects the current market conditions, and itdoes not materially affect the Company’s profitability, assets or liabilities. G. Arrangements upon Change of Control 21.The following benefits may be granted to the Executive Officers in addition to the benefits applicable in the case of any retirement or termination of serviceupon a “Change of Control”: 21.1.Vesting acceleration of outstanding options or other equity-based awards; 21.2.Extension of the exercising period of options for Nova’s Executive Officer for a period of up to one (1) year in case of an Executive Officer otherthan the CEO and two (2) years in case of the CEO, following the date of employment termination; and 21.3.Up to an additional six (6) months of continued base salary and benefits following the date of employment termination (the “AdditionalAdjustment Period”). For avoidance of doubt, such additional Adjustment Period shall be in addition to the advance notice and adjustment periodspursuant to Sections 14 and 15 of this Policy, but subject to the limitation set forth in Section 18 of this Policy. 21.4.A cash bonus not to exceed 150% of the Executive Officer’s annual base salary in case of an Executive Officer other than the CEO and 200% incase of the CEO. H. Board of Directors Compensation 22.3.The following benefits may be granted to Nova's Board members: All Nova’s Board members, excluding the chairman of the Board, shall beentitled to an equal annual and per-meeting compensation.22.2. The compensation of the Company’s directors (including external directors andindependent directors) shall be in accordance with the Companies Regulations (Rules Regarding the Compensation and Expenses of an ExternalDirector), 5760-2000, as amended by the Companies Regulations (Relief for Public Companies Traded in Stock Exchange Outside of Israel), 5760-2000, as such regulations may be amended from time to time (“Compensation of Directors Regulations”) and, in any event, the annual paymentand the per-meeting payment shall not be greater than two (2) times the maximal annual payment and per-meeting payment, respectively, allowedunder the Compensation of Directors Regulations, in the case of Nova.22.3.Notwithstanding the provisions of Sections 22.1 and 22.2 above, in special circumstances, such as in the case of a professional director, an expertdirector or a director who makes a unique contribution to the Company, such director’s compensation may be different than the compensation of allother directors and maybe greater than the maximal amount allowed, in the case of Nova, by the Compensation of Directors Regulations. 1122.4.The chairman of the Board shall be entitled to a base compensation that shall not exceed six (6) times the compensation of a director (includingannual and per meeting compensation and excluding equity compensation). 22.5.Each member of Nova’s Board (excluding the chairman of the Board) may be granted annually equity-based awards with a total fair market valueof up to US$150,000. The equity-based awards shall vest annually over a period of between three (3) to four (4) years. 22.6.The chairman of the Board may be granted up to an average annual equity compensation (of two (2) sequential years) that shall not exceed six (6)times of any director’s equity compensation per year. 22.7.In addition, members of Nova’s Board may be entitled to reimbursement of expenses when traveling abroad on behalf of Nova. 22.8.It is hereby clarified that the compensation stated under Section H will not apply to directors who serve as Executive Officers. I. Miscellaneous 23.Nothing in this Policy shall be deemed to grant any of Nova’s Executive Officers or employees or any third party any right or privilege in connection withtheir employment by the Company. Such rights and privileges shall be governed by the respective personal employment agreements. The Board maydetermine that none or only part of the payments, benefits and perquisites detailed in this Policy shall be granted, and is authorized to cancel or suspend acompensation package or part of it. 24.An Immaterial Change in the Terms of Employment of an Executive Officer other than the CEO may be approved by the CEO, provided that the amendedterms of employment are in accordance with this Policy. An “Immaterial Change in the Terms of Employment” means a change in the terms ofemployment of an Executive Officer with an annual total cost to the Company not exceeding an amount equal to two (2) monthly base salaries of suchemployee. 25.In the event that new regulations or law amendment in connection with Executive Officers and directors compensation will be enacted following theadoption of this Policy, Nova may follow such new regulations or law amendments, even if such new regulations are in contradiction to the compensationterms set forth herein. ********************* This Policy is designed solely for the benefit of Nova and none of the provisions thereof are intended to provide any rights or remedies to any person other thanNova. 12Exhibit 12.1CERTIFICATION I, Eitan Oppenhaim, certify that:1. I have reviewed this annual report on Form 20-F of Nova Measuring Instruments 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 makethe 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 respectsthe 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 and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange 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 thecompany and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin 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 aboutthe 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 coveredby the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe company’s auditors and the audit committee of company’s board of directors (or persons performing the equivalent function):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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’sinternal control over financial reporting.Date: March 1, 2021/s/ Eitan OppenhaimEitan OppenhaimPresident and Chief Executive OfficerExhibit 12.2 CERTIFICATIONI, Dror David, certify that:1. I have reviewed this annual report on Form 20-F of Nova Measuring Instruments 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 makethe 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 respectsthe 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 and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange 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 thecompany and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin 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 aboutthe 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 coveredby the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe company’s auditors and the audit committee of company’s board of directors (or persons performing the equivalent function):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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’sinternal control over financial reporting.Date: March 1, 2021/s/ Dror DavidDror DavidChief Financial OfficerExhibit 13.1 CERTIFICATION PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002 I, Eitan Oppenhaim, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: 1. This Annual Report on Form 20-F of Nova Measuring Instruments Ltd. (the “Company”) for the period ended December 31, 2020 (the “Report”) fullycomplies with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2021 /s/ Eitan OppenhaimEitan OppenhaimPresident and Chief Executive OfficerExhibit 13.2 CERTIFICATION PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002 I, Dror David, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: 1. This Annual Report on Form 20-F of Nova Measuring Instruments Ltd. (the “Company”) for the period ended December 31, 2020 (the “Report”) fullycomplies with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2021 /s/ Dror DavidDror DavidChief Financial OfficerExhibit 15.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement (Forms S-8 Nos. 333-147140, 333-184585, 333-202550 and 333-220158) pertaining tothe 2007 Incentive Plan and 2017 Share Incentive Plan of Nova Measuring Instruments Ltd. of our reports dated March 1, 2021, with respect to theconsolidated financial statements of and the effectiveness of internal control over financial reporting of Nova Measuring Instruments Ltd., included in thisAnnual Report (Form 20-F) for the year ended December 31, 2020. /s/ Kost Forer Gabbay & KasiererKost Forer Gabbay & KasiererA member of Ernst & Young Global Tel Aviv, IsraelMarch 1, 2021

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