KRNT 20-F
Kornit Digital Ltd. (KRNT)
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
OR
For
the fiscal year ended
OR
OR
Commission
file number
(Exact name of Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Kornit Digital Ltd.
Tel:
Fax:
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.
☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
☐
Yes ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Accelerated filer: ☐ | Non-accelerated filer: ☐ | |
| Emerging growth company: |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
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 its audit report.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| ☒ | ☐ | International Financial 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 ☒
TABLE OF CONTENTS
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information included or incorporated by reference in this annual report on Form 20-F may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often characterized by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue,” “believe,” “should,” “intend,” “project” or other similar words, but are not the only way these statements are identified.
These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that contain projections of results of operations or of financial condition and all statements (other than statements of historical facts) that address activities, events or developments that we expect, project, believe, anticipate, intend or project will or may occur in the future. The statements that we make regarding the following matters are forward-looking by their nature:
ii
| ● | our plans to develop, introduce and sell new or improved products and product enhancements, including specifically our Atlas Max Poly, Presto Max, Atlas and Presto Upgrade products; | |
| ● | our expectations regarding the expansion of our serviceable addressable market; | |
| ● | our expectations regarding our future gross margins and operating expenses; | |
| ● | our expectations regarding our growth and overall profitability; | |
| ● | our expectations concerning sales to, and revenues to be generated from, significant customers, including Amazon; | |
| ● | our expectations regarding the further duration of the headwinds being caused by macro-economic factors including rising inflation and interest rates, in addition to continued global supply problems, and their impact on our revenues, profitability and cash flows; | |
| ● | our expectations regarding the impact of variability on our future revenues; | |
| ● | our expectations regarding drivers of our future growth, including anticipated sales growth, penetration of new markets, and expansion of our customer base; | |
| ● | our plans to continue our expansion into new product markets; | |
| ● | our plans regarding our distribution strategy for our products; | |
| ● | our goals with respect to the environmental impact of our operations and products; | |
| ● | our expectations concerning competition; | |
| ● | our expectations regarding the success of our new products and systems; | |
| ● | the expected impact of new accounting pronouncements on our results of operations; | |
| ● | the impact of government laws and regulations; | |
| ● | our expectations regarding our anticipated cash requirements for the next 12 months; | |
| ● | our plans to expand our international operations; | |
| ● | our plans to file and procure additional patents relating to our intellectual property rights and the adequate protection of these rights; | |
| ● | our plans to pursue strategic acquisitions or invest in complementary companies, products or technologies and our expectations as to the success of those acquisitions and investments; and | |
| ● | our expectations concerning our access to financing to support the expansion of our operations; |
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, levels of activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the risks described in “ITEM 3.D. Risk Factors” and the additional information contained in “ITEM 4 Information on the Company” and “ITEM 5. Operating and Financial Review and Prospects.”
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur.
iii
USE OF TRADE NAMES
Throughout this annual report, we refer to various trademarks, service marks and trade names that we use in our business. “Kornit Digital”, the “K” logo and other trademarks or service marks of Kornit Digital Ltd. appearing in this annual report are the property of Kornit Digital Ltd. We have several other registered trademarks, service marks and pending applications relating to our solutions. Although we have omitted the “®” and “™” trademark designations for such marks in this annual report, all rights to such trademarks are nevertheless reserved. Other trademarks and service marks appearing in this annual report are the property of their respective holders. We do not intend our use or display of other companies’ tradenames, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
CERTAIN ADDITIONAL TERMS AND CONVENTIONS
In this annual report, unless the context otherwise requires:
| ● | references to “Kornit,” “Kornit Digital,” “our company,” “the Company,” “the registrant,” “we,” “us,” and “our” refer to Kornit Digital Ltd.; | |
| ● | references to “ordinary shares”, “our shares” and similar expressions refer to the Company’s ordinary shares, par value NIS 0.01 per share; | |
| ● | references to “dollars”, “U.S. dollars”, “U.S. $” and “$” are to United States Dollars; | |
| ● | references to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency; | |
| ● | references to “GAAP” are to U.S. Generally Accepted Accounting Principles; | |
| ● | references to our “articles” are to our Articles of Association, as amended; | |
| ● | references to the “Companies Law” are to the Israeli Companies Law, 5759-1999, as amended; | |
| ● | references to the “Securities Act” are to the U.S. Securities Act of 1933, as amended; | |
| ● | references to the “Exchange Act” are to the U.S. Securities Exchange Act of 1934, as amended; | |
| ● | references to “Nasdaq” are to the Nasdaq Stock Market; and | |
| ● | references to the “SEC” are to the United States Securities and Exchange Commission. |
iv
PART I
ITEM 1. Identity of Directors, Senior Management and Advisers.
Not Applicable.
ITEM 2. Offer Statistics and Expected Timetable.
Not Applicable.
ITEM 3. Key Information.
| A. | [Reserved] |
| B. | Capitalization and Indebtedness |
Not applicable.
| C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
| D. | Risk Factors |
Our business involves a high degree of risk. Please carefully consider the risks we describe below in addition to the other information set forth in this annual report and in our other filings with the SEC. These risks could materially and adversely affect our business, financial condition and results of operations. See “Cautionary Note Regarding Forward-Looking Statements.”
1
Risk Factors Summary
The following is a summary of the principal risks that could materially adversely affect our business, results of operations, and financial condition, all of which are more fully described below. This summary should be read in conjunction with the other information discussed in this Item 3.D, and should not be relied upon as an exhaustive summary of the material risks facing our business. Please carefully consider all of the information discussed in this Item 3.D. “Risk Factors” and elsewhere in this annual report for a more thorough description of these and other risks.
Summary of Risks Related to Our Business and Our Industry
| ● | Our success is dependent on adoption of digital textile printing in place of existing methods of printing. |
| ● | We are dependent on our ability to timely introduce new products that are accepted by the market and increase our market share. |
| ● | We face increased competition from a wide variety of market participants. |
| ● | Our significant reliance on a small number of significant customers, including Amazon. |
| ● |
Our significant reliance on suppliers, including single-source suppliers, coupled with global supply chain delays, and our reliance on third-party manufacturers. |
| ● | Overcapacity for our customers’ use of our systems or for our use of our new ink manufacturing facility could reduce our operating margins. | |
| ● |
Headwinds caused by macro-economic factors including rising inflation and interest rates, in addition to continued global supply problems, and their impact on our revenues, profitability and cash flows. | |
| ● | The scrutiny that may be applied to sustainability practices of companies such as ours. |
| ● | We may not be able to successfully acquire and integrate other companies and technologies, necessary for our growth, and to finance such acquisitions. |
| ● | Our expanding international operations are accompanied by costs, operational risks and required regulatory compliance in many jurisdictions. |
| ● | We may be unable to continue to utilize tax benefits and avoid significant tax liabilities. |
Summary of Risks Related to Intellectual Property
| ● | We may be unable to protect our patents and trademarks from infringement, and avoid infringing the intellectual property rights of others. |
Summary of Risks Related to Our Ordinary Shares
| ● |
Volatility of our share price. | |
| ● | Increased costs as a public company as a result of new compliance initiatives. |
Summary of Risks Related to Our Operations in Israel
| ● | Israeli government tax benefits we receive may be terminated if we cease to qualify for them. | |
| ● | Terms of our Israeli research and development grants restrict our ability to transfer manufacturing operations or technology outside of Israel. |
2
Risks Related to Our Business and Our Industry
If the market for digital textile printing does not develop as we anticipate, our sales may not grow as quickly as expected and our share price could decline.
The global printed textile industry is currently dominated by analog printing processes, the most common of which are screen printing and carousel printing. If, among other developments, the global printed textile industry does not more broadly accept digital printing as an alternative to analog printing, our revenues may not continue to grow, or may decline, and our share price could suffer. Widespread adoption of digital textile printing depends on, among other things, the willingness and ability of businesses in the printed textile industry to replace their existing analog printing systems with digital printing systems. These businesses may decide that digital printing processes are less reliable, less cost-effective, of lower quality, or otherwise less suitable for their commercial needs than analog printing processes. For example, screen printing currently tends to be faster and less expensive than digital printing on a cost per print basis for larger production runs. Even if businesses are persuaded as to the benefits of digital printing, we do not know whether potential buyers of digital printing systems will delay their investment decisions. As a result, we may not correctly estimate demand for our solutions, which could cause us to fail to meet customer needs in a timely manner or fail to take advantage of economies of scale in the production of our solutions.
Our results of operations will be adversely impacted by our failure to timely introduce new products, or to achieve market acceptance or gain adequate market share for new or existing products.
Our ability to develop innovative new systems and products is important to our business strategy and competitive position. Difficulties or delays in research, development, production or commercialization of new systems and products could adversely impact our sales and competitive position. Over the course of 2022, we introduced the Kornit Atlas MAX Poly system – an industry-first direct-to-garment (DTG) solution for vibrant, colorful design on polyester and poly-blended apparel. We cannot ensure that the significant investments that we have made in distribution, sales and customer service teams to launch this and other systems or platforms will enable us to successfully market, sell and distribute them as planned. Market acceptance of our systems and related products will depend on, among other things, the systems demonstrating a real advantage over existing systems, the success of our sales and marketing teams in creating awareness of the systems, the sales price and the return on investment of the systems relative to alternative systems, customer recognition of the value of our technology, the effectiveness of our marketing campaigns, and the general willingness of potential customers to try new technologies. If we fail to develop and launch new systems and products, experience cost overruns in connection with such development, or the market does not accept our new systems and products, our business, results of operations and financial condition would be adversely affected. Even if we are successful in selling our new systems which provide greater efficiency and lower cost per print, sales of ink and other consumables per system may decrease, which may adversely affect our results of operations, including gross margin and overall profitability.
If our customers use alternative ink and consumables and/or alternative spare parts in our systems, our gross margin could decline significantly, and our business could be harmed.
Our business model benefits significantly from recurring sales of our ink and other consumables and spare parts for our existing and growing installed base of systems. Third parties could try to sell, and purchasers of our systems can seek to buy, alternative versions of our ink and other consumables or alternative spare parts. We have encountered limited instances of these activities by third parties in specific regions. Third-party ink and other consumables and spare parts might be less expensive or otherwise more appealing to our customers than our ink and other consumables. Significant sales of third-party inks and other consumables and spare parts to our customers could adversely impact our revenues and would have a more significant effect on our gross margins and overall profitability.
Given the sensitivity of our systems and, in particular, print heads to lower quality ink, which may cause our print heads to clog or otherwise malfunction, our systems are setup to operate at the highest throughput level only when using our original ink and other consumables in order to protect them from damage. In addition, since we are unable to control the impact of third-party inks, their use and the use of third-party spare parts might void the warranty that comes with our systems. We have also sought to protect the proprietary technology underlying our ink and other consumables through patents and other forms of intellectual property protections and include an RFID mechanism with our ink tanks. These steps that we have taken to ensure the smooth operation of our systems and our ability to fully invoke all our intellectual property rights may be challenged. Any reduction in our ability to market and sell our ink and other consumables and spare parts for use in our systems may adversely impact our future revenues and our overall profitability.
3
We face increased competition and if we do not compete successfully, our revenues and demand for our solutions could decline.
The principal competition for our digital printing systems comes from manufacturers of analog screen printing systems, textile printers and ink, such as M&R Printing Equipment, Inc., Machines Highest Mechatronic GmbH and S. Roque - Máquinas e Tecnologia Laser, S.A. Our principal competitor in the industrial digital direct-to-garment market is Aeoon Technologies GmbH. In 2020, we learned of an additional competitor in this market named 240 tech LLC/OvalJet. We also face some competition in the market from M&R, ROQ, Brother International Corporation, Seiko Epson Corporation, Ricoh Company Ltd. and a number of smaller competitors in scenarios where industrial level production capacity is attempted to be built by the use of multiple entry level systems. More recently, we’ve seen some adoption of commercial level direct-to-film printing methodologies, which is a sub-segment of traditional heat transfer. Our competitors in the Direct-to-Fabric (also known as R2R), or DTF, market include: Dover Corporation through its MS Printing Solutions S.r.l. subsidiary; Seiko Epson Corporation through its subsidiary, Fratelli Robustelli S.r.l; Durst Phototechnik AG; Electronics for Imaging, Inc. through its Reggiani Macchine SpA subsidiary; and a number of smaller competitors. The principal competition for our KornitX global fulfillment network (GFN) offering which enables on-demand production of textiles and other goods, comes from a variety of virtual marketplaces that are offering certain fulfillment services or applications, or purpose-built direct API connectivity to specific fulfillers. The principal competition for our KornitX production floor management workflow solutions come from homegrown IT solutions developed by existing and prospective customers, as well as a number of small software companies.
Some of our current and potential competitors have larger overall installed bases, longer operating histories and greater name recognition than we have. In addition, many of these competitors have greater sales and marketing resources, more advanced manufacturing operations, broader distribution channels and greater customer support resources than we have. Some of our competitors in the DTF market gained their current market position by merging with, or acquiring, existing companies in the DTF market. Current and future competitors may be able to respond more quickly to changes in customer demands and devote greater resources to the development, promotion and sale of their printers and ink and other consumables than we can. Our current and potential competitors in both the direct-to-garment and direct-to-fabric markets may also develop and market new technologies that render our existing solutions unmarketable or less competitive. In addition, if these competitors develop products with similar or superior functionality to our solutions at prices comparable to or lower than ours, we may be forced to decrease the prices of our solutions in order to remain competitive, which could reduce our gross margins.
Our move towards a higher proportion of direct sales in place of indirect sales may have adverse consequences.
Our go-to-market strategy consists of a hybrid model of indirect and direct sales, depending on the specific territory into which we are selling. We continually evaluate that strategy in the geographies we serve in an effort to best serve our direct or indirect customers. When we shift towards a direct sales model in relevant territories, we may experience an initial disruption to our sales efforts in those jurisdictions as we transition from our previous sales structure. In addition, a shift to a direct sales model might result in a short-term impact on our results of operations, including due to the acquisition of inventory that requires a step up in basis and other such accounting impacts and costs associated with increased headcount and related expenses. Moreover, the implementation of a direct sales model might require significant management time and attention which might have an adverse impact on our business and results of operations during the transition period. We have been exposed to risks as a result of transitioning from an indirect sales model to a direct sales model in relevant territories, such as difficulties maintaining relationships with specific customers, hiring appropriately trained personnel, and ensuring compliance with local product registration requirements.
A significant portion of our sales is concentrated among a small number of customers, and our business would be adversely affected by a decline in sales to, or the loss of, those customers.
During the years ended December 31, 2022 and 2021, our ten largest customers accounted for approximately 51% and 57% of our revenues, respectively. During those same years, out of the foregoing group of largest customers, Amazon Corporate LLC, a subsidiary of Amazon.com, Inc., which we collectively refer to as Amazon, accounted for approximately 27%. Given the concentration of our revenues with these customers, the loss of either Amazon or another one of our significant customers, or variability in their order flows, could materially adversely affect our revenues or results of operations.
Macro-economic headwinds caused by inflation, rising interest rates and global supply problems have been adversely impacting our revenues, profitability and cash flows, and may continue to do so.
Our business depends on overall demand within the global printed fashion and textile industries, the economic health of our current and prospective clients and worldwide economic conditions. We market and sell our digital textile printing systems, consumables, and services primarily in the Americas, European, Middle East and Asia, and Asia Pacific regions. Adverse economic conditions in those markets, including due to rising inflation, increased interest rates, supply chain disruptions, decreased economic output and fluctuations in currency exchange rates, have been significantly reducing, and may continue to reduce, overall demand for our systems, consumables and services. These factors have also delayed or lengthened our sales cycles, and have inhibited our international expansion, and may also lead to longer collection cycles for payments due from our customers, as well as potentially result in an increase in customer bad debt. While the long-term implications of macroeconomic events on our business, results of operations and overall financial position remain uncertain, in the short term these headwinds are challenging our business. We have experienced a slower growth rate in new systems sales, consumables, and services, which has led to recent declines in our revenues, profitability and cash flows.
4
In addition to exerting the foregoing impact, macro-economic headwinds may amplify a number of risks for us, including, but not limited to, the following:
| ● | our ability to increase sales of new, enhanced systems to existing customers may be hindered due to more cautious purchasing and investment strategies by corporate customers, in addition to systems overcapacity in some customer sets; |
| ● | reduced economic activity, which could lead to a prolonged recession, could negatively impact consumer discretionary spending on garments and apparel, which in turn could severely impact our business operations, financial condition, and liquidity; |
| ● | our customer success efforts, our ability to enter into new markets and to acquire new customers may be impeded, in part due to potentially lower conversion rates and delays and lengthening of our sales cycles; |
| ● | there may be an increase in our credit losses reserves as customers face economic hardship and collectability becomes more uncertain, including due the risk of bankruptcies; |
| ● | our ability to retain, attract and recruit employees may be adversely impacted if our growth and profitability decrease; |
| ● | our ability to complete acquisitions may be hampered if we need to seek financing for such acquisitions; and |
| ● | our ability to raise capital may be negatively impacted. |
The full impact of economic and other headwinds on our business and our future performance may also have the effect of heightening any of our other risk factors described in this annual report and is difficult to predict how long those headwinds will continue, As such, there is risk that any expectations for our business and guidance we provide to the market may be incorrect.
Our operating results are subject to seasonal variations, which could cause the price of our ordinary shares to decline.
Our business is seasonal. Either the third or fourth quarter have historically been our strongest quarter in terms of revenues, and the first quarter has been our weakest. This seasonality coincides with spending in anticipation of the holidays towards the end of the year, especially in the United States and Europe.
In addition, during the third and fourth quarters, when customer spending is at its highest levels, we enjoy a more favorable revenue mix, generating greater revenues from the sales of ink and other consumables than in the first quarter. Since sales of ink and other consumables generate higher gross margins than systems sales, gross margin in the third or fourth quarter tends to be higher than gross margin in the first quarter, when our customers typically reduce their system utilization rates significantly, and thereby purchase less ink and other consumables. This impact leads to a reduction in overall operating margins. As we continue to focus our sales efforts on a diverse set of customer accounts, and as we continue to invest in the growth of our business, the impact of this seasonal decline in revenues generated from sales of ink and other consumables has had and may continue to have a more pronounced impact on gross margins and operating margins.
Our quarterly results of operations have fluctuated in the past and may fluctuate in the future due to variability in our revenues.
Our revenues and other results of operations have fluctuated from quarter to quarter in the past and could continue to fluctuate in the future. Our revenues depend in part on the sale and delivery of our systems, and we cannot predict with certainty when sales transactions for our systems will close or when we will be able to recognize the revenues from such sales, which generally occurs upon delivery of our systems. Customers that we expect to purchase our systems may delay doing so due to timing of obtaining regulatory permits, site readiness, or a change in their priorities or business plans, including as a result of adverse general economic conditions that may disproportionately impact the ability of the small-mid size businesses that constitute a significant portion of our customer base to expend capital or access financing sources. Such conditions could also force us to reduce our prices or limit our ability to profit from economies of scale, which could harm our gross margins. As a result of these factors, we may fail to meet market expectations for any given quarter if sales that we expect for that quarter are delayed until subsequent quarters or canceled. The closing of one or more large transactions in a particular quarter may make it more difficult for us to meet market expectations in subsequent quarters, and our failure to close one or more large transactions in a particular quarter could adversely impact our revenues and margins for that quarter. In addition, we may experience slower growth in our gross margins as our new systems gain commercial acceptance. Our gross margins may also fluctuate based on the regions in which sales of these systems occur.
Our customers generally purchase our ink and other consumables on an as-needed basis, and delays in making such purchases by a number of customers could result in a meaningful shift of revenues from one quarter to the next. Moreover, because ink and other consumables have a shelf life of up to 12 months, we typically maintain inventories of ink and other consumables sufficient to cover our average sales for one quarter ahead. These inventories may not match customers’ demands for any given quarter, which could cause shortages or excesses in our ink and other consumables inventory and result in fluctuations of our quarterly revenues. To the extent that we have excess ink and consumables inventory that we are unable to sell due to expiration dates, we may have to write off such inventory. These inventory requirements may also limit our ability to profit from economies of scale in the production of our ink and other consumables.
5
Furthermore, we base our current and future expense levels on our revenue forecasts and operating plans, and our costs are relatively fixed in the short term, due in part to extended supply and logistics lead times required for ordering certain components of our systems either directly by us or by our contracted manufacturers. Although we took decisive actions to reduce our cost structure in the course of 2022, we may nevertheless not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues during a particular future quarter, and even a relatively small decrease in revenues could disproportionately and adversely affect our financial results for that quarter. The variability and unpredictability of these and other factors could result in our failing to meet financial expectations for a given period.
Our contractual arrangements with Amazon, a significant customer, contain a number of material undertakings by us and other agreements the impact of which cannot be fully predicted in advance.
In January 2017, we entered into a master purchase agreement with an affiliate of Amazon.com, Inc. governing sales of our systems and ink and other consumables at agreed-upon prices that vary based on sales volumes. We also agreed to provide maintenance services and extended warranties to Amazon at agreed prices. The term of the agreement was five years beginning on May 1, 2016, and extends automatically for additional one-year periods unless terminated by Amazon. Under the agreement, we issued to an affiliate of Amazon warrants to purchase up to 2,932,176 of our ordinary shares, which vested based on payments made by Amazon in connection with the purchase of goods and services from us. Amazon exercised all of those original warrants on a cashless (net) exercise basis in connection with our September 2020 and November 2021 public offerings, resulting in the issuance to it, and its sale in those offerings, of 1,689,942 and 705,953 ordinary shares, respectively. In September 2020, we and Amazon entered into a new transaction agreement under which we issued to an affiliate of Amazon new warrants to acquire up to 3,401,028 of our ordinary shares at a purchase price of $59.26 per share. Those new warrants vest over a five-year period starting in January 2021 based on payments made by Amazon in connection with the purchase of goods and services from us.
Our contractual agreements with Amazon contain a number of material undertakings and other arrangements:
| ● | Our revenues are presented net of the relative value of the warrants in each particular period related to the revenues recognized. The warrants are reported as a reduction of revenue in the Company’s income statement when related revenues are recognized. Up until December 31, 2018, the value of the warrants was determined as the fair value at the time revenues were recognized, and that value was remeasured on each financial reporting date until total revenues of $5 million were recognized. Following our adoption of ASU 2018-07 on January 1, 2019 and our early adoption of ASU 2019-08 on the same date, effectively, from January 1, 2019 (the adoption date), the value of the current warrants is determined as their fair value as of the adoption date and for the new warrants - their fair value as at the grant date of September 14, 2020. |
| ● | We have agreed to provide a rebate to Amazon based on the number of systems and amount of ink and other consumables Amazon orders in a given 12-month period. The timing and scale of any such rebate may be difficult to predict and may cause fluctuations in our quarterly revenues, gross profit and operating profit. | |
| ● | We are required to notify Amazon 12 months in advance if we intend to stop supporting one of the products or services that we supply to Amazon and to continue to manufacture the product or provide such service during such 12-month period. Subject to certain exceptions, we are required to continue to supply ink in such quantities as Amazon requires for at least 36 months after the earlier of (1) the end of the term of the master purchase agreement or (2) 18 months following the purchase of the last product sold pursuant to the agreement. | |
| ● | We are required to deliver our products and services to Amazon and to comply with a service level agreement. If we fail to meet the requirements under such service level agreement, Amazon will receive credits against its cost for those delayed products or services. |
The impact of the provisions listed above cannot be fully predicted in advance and could, in certain circumstances, adversely impact our business or results of operations, or the manner in which investors or analysts assess and perceive our performance.
If our relationships with suppliers, especially with single source suppliers of components, were to terminate, our business could be harmed.
We maintain an inventory of parts to facilitate the timely assembly of our systems, production of our ink and other consumables, and servicing our installed base. Most components are available from multiple suppliers, although certain components used in our systems and ink and other consumables, such as our print heads and certain chemicals included in our inks, are only available from single or limited sources as described below.
6
| ● | The print heads for our systems are supplied by a sole supplier, FujiFilm Dimatix, Inc., or FDMX. We entered into an agreement with FDMX in 2015, pursuant to which FDMX sells us certain off-the-shelf print heads and additional products, all of which FDMX regularly sells to providers of inkjet systems. Under the agreement, as last amended on June 20, 2022, the initial term of the agreement will expire on December 31, 2025, and the agreement will automatically renew for an additional two-year period, unless either party notifies the other party at least 90 days prior to expiration of the initial term that it does not want such a renewal. The agreement provides that FDMX may increase the prices of the products that we purchase from it upon 180-days’ prior notice at any time, subject to certain conditions. The agreement further provides that FDMX may, at its option, discontinue products supplied under the agreement, provided that we are given one-year notice of the planned discontinuance and are provided with an end-of-sale purchase program. | |
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A chemical used in some of our inks is supplied by B.G. (Israel) Technologies Ltd., or BG Bond, a subsidiary of Ashtrom Ltd., a large public Israeli industrial company. The chemicals were previously supplied under a definitive agreement which has expired, and currently we purchase these chemicals on a purchase order basis. For some of our inks, another chemical is supplied by an affiliate of The Dow Chemical Company, a multinational producer of chemicals and other compounds. We currently purchase these chemicals on a purchase order basis
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| ● | Dispersing agents used in some of our inks are supplied by BASF SE, which to our knowledge is the only source of supply of those agents. We purchase these dispersing agents from BASF on a purchase order basis. We maintain safety stock of these chemicals in an amount which will allow us to continue our manufacturing for several fiscal quarters in case of discontinuation. | |
| ● | Several raw materials and pigments used in some of our inks are supplied by Heubach Group. We currently purchase these raw materials and pigments on a purchase order basis. We maintain safety stock of these raw materials and pigments in an amount which will allow us to continue our manufacturing for several fiscal quarters in case of discontinuation. We are currently in the process of entering into a long-term supply agreement with Heubach Group. | |
| ● | Certain parts of the control system of our systems are supplied by a sole supplier, Yaskawa Europe Technology Ltd., an affiliate of Yaskawa Electric Corporation, or Yaskawa. Our turnkey suppliers (Flex and Sanmina- SCI Israel Medical Systems Ltd.), which assemble the control system on our behalf, purchase those control system parts from Yaskawa. We also purchase additional, spare control system parts from Yaskawa for our service department on a purchase order basis. Yaskawa maintains additional inventory of these control system parts as safety stock for our benefit, based on our requirements. | |
| ● | Some of our printing systems are compatible with a dryer that we purchase from Adelco Screen Process, or Adelco, which fulfills most of the demand for that dryer. The dryer is supplied under an April 2019 agreement that we entered into with Adelco. |
The loss of any of these suppliers, or of a supplier for which there are limited other sources, could result in the delay of the manufacture and delivery of our systems or inks and other consumables. For instance, FDMX has from time to time indicated that it may discontinue manufacturing the print head that we currently source from it and use in our systems, although it has never provided notice that it is actually doing so. In the event FDMX discontinues manufacturing the print head, we would be required to qualify a new print head for our systems (based only on whatever knowledge we have gained from qualifying print heads in the past). In order to minimize the risk of any impact from a disruption or discontinuation in the supply of print heads, raw materials or other components from limited source suppliers, we maintain an additional inventory of such components, in addition to the end-of-life purchase program that would be available to us if the products we purchase from FDMX were discontinued. Nevertheless, such inventory may not be sufficient to enable us to continue supplying our products for a longer period, should we need to locate and qualify a new supplier.
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Other risks resulting from our reliance on suppliers include:
| ● | if we experience an increase in demand for our solutions, our suppliers may be unable to provide us with the components that we need in order to meet that increased demand in a timely manner; | |
| ● | our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements; | |
| ● | we may experience production delays related to the evaluation and testing of products from alternative suppliers; |
| ● | we may be subject to price fluctuations due to a lack of long-term supply arrangements for key components; |
| ● | we or our suppliers may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment of our systems or inks and other consumables; and |
| ● | fluctuations in demand for components that our suppliers manufacture for others may affect their ability or willingness to deliver components to us in a timely manner. |
If any of these risks materialize, the costs associated with developing alternative sources of supply or assembly in a timely manner could have a material adverse effect on our ability to meet demand for our solutions. Our ability to generate revenues could be impaired, market acceptance of our solutions could be adversely affected, and customers may instead purchase or use alternative products. We may not be able to find new or alternative components of a requisite quality or find that we are unable to reconfigure our systems and manufacturing processes in a timely manner if the necessary components become unavailable. As a result, we could incur increased production costs, experience delays in the delivery of our solutions and suffer harm to our reputation, which may have an adverse effect on our business and results of operations.
The recent constraints in global supply chains, which began in 2020 as a by-product of the COVID-19 pandemic, and which may be exacerbated by Russia’s invasion of Ukraine in February 2022, enhance the risk that we will not have access to the materials provided by our suppliers. While we have implemented the following upgrades to our modes of supply, in order to ensure availability of our products to our customers at all times, there is no guarantee that these measures will continue to work adequately well:
| ● | Providing our contract manufacturers with advanced manufacturing forecasts for extended periods. |
| ● | Minimizing as much as possible the number of our single sole source suppliers. |
| ● | We are making concurrent efforts to engineer components internally where feasible. |
Overcapacity in the global printed fashion and textile industries could cause our customers to underutilize existing printing systems that they have purchased from us and to reduce their orders of new systems. That could similarly cause us to underutilize our new ink manufacturing facility. Such a trend could reduce our operating margins and have a material adverse effect on our financial performance.
It is sometimes difficult to predict future demand for printing in the global printed fashion and textile industries in which we operate, which makes it challenging for our customers to estimate future requirements for production capacity and avoid periods of overcapacity. Fluctuations in the growth rate of our customers’ businesses relative to the growth rate in demand for our printing systems also can lead to overcapacity for our customers and contribute to cyclicality in the market for our systems.
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Capacity expansion projects have long lead times and require capital commitments based on forecasted product trends and demand well in advance of production orders from customers. In recent years, we have made significant capital investments to expand our systems and materials capacity to address forecasted future demand patterns, including our investment in our new ink manufacturing facility in Kiryat Gat. These capacity additions may exceed the near-term demand requirements for our products, including both systems and consumables, leading to overcapacity situations and underutilization of our manufacturing facilities.
As many of our manufacturing costs are fixed, these costs cannot be reduced in proportion to the reduced revenues experienced during periods of underutilization. Underutilization of our manufacturing facilities can adversely affect our gross margin and other operating results. If demand for our products experiences a prolonged decrease, we may be required to close or idle facilities and write down our long-lived assets or shorten the useful lives of underutilized assets and accelerate depreciation, which would increase our expenses.
Our new Kiryat Gat ink manufacturing facility was constructed on lands leased by us from the Israel Lands Administration, or ILA, under a long term (49 years) lease agreement. If we are unable to continue to lease such lands, we would be unable to use the facility and our results of operations and future prospects will suffer as a result.
In November 2018, we entered into a development agreement, which we refer to as the Development Agreement, with the ILA for the construction of our new, modern, ink manufacturing facility in Kiryat Gat on lands leased from the ILA. Construction was concluded at the end of 2021, and we officially opened the facility on January 26, 2022. Following the completion of the construction and our receipt of all required approvals from the ILA, we entered into a long-term lease agreement with the ILA, or the Lease Agreement, for a period of 49 years and which may be renewed for an additional 49 years, which agreement has replaced the Development Agreement. The Development Agreement provided, and the Lease Agreement provides, that if our company were a “foreign subject,” which includes being under foreign control (i.e., a majority of our ordinary shares held by non-Israelis), that would constitute a fundamental breach under the agreement. We followed (in the case of each of the Development Agreement and the Lease Agreement) a specific standard process for seeking approval from the ILA for our entering into the agreement. However, because of our potential status as a “foreign subject,” given that our shares are traded on Nasdaq and are held by multiple shareholders whose identities are unknown, the ILA would be entitled to terminate that agreement if it determines that our company is a “foreign subject”. If the Lease Agreement is terminated, we would be unable to use the new Kiryat Gat facility constructed on that property, which would have a material adverse effect on our results of operations.
Disruption of operations at our manufacturing site or those of third-party manufacturers could prevent us from filling customer orders on a timely basis.
We manufacture our ink and other consumables at our new, modern facility in Kiryat Gat, Israel. We also rely on contract manufacturing services provided by Flex, and Sanmina-SCI Israel Medical Systems Ltd. which are also in Israel, to assemble our systems. We expect that almost all of our revenues in the near term will be derived from the systems and ink and other consumables manufactured at these facilities.
The loss of any of these contract manufacturers could result in the delay of the assembly and delivery of our systems. If that occurs or these contract manufacturers cease to provide manufacturing services for any reason, the costs associated with developing alternative sources of assembly in a timely manner could have a material adverse effect on our ability to meet demand for our solutions. Our ability to generate revenues could be impaired, market acceptance of our solutions could be adversely affected, and customers may instead purchase or use alternative products.
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If operations in any of these facilities were to be disrupted due to a major equipment failure or power failure lasting beyond the capabilities of backup generators or other events outside of our reasonable control, our manufacturing capacity could be shut down for an extended period, we could experience a loss of raw materials or finished goods inventory and our ability to operate our business would be harmed. In addition, in any such event, the repair or reconstruction of our or our third-party manufacturers’ manufacturing facilities and storage facilities could take a significant amount of time. During this period, we or our third-party manufacturers would be unable to manufacture some or all of our systems or we may not be able to produce our ink and other consumables.
Our operating results could decline in the near-term if we fail to execute on our growth strategies.
Our operating margin was (3.5%) in 2020, 4.0% in 2021 and (25.7%) in 2022. Our growth strategies, many of which are aimed at achieving operating and net profit margins, include increasing sales to existing customers, acquiring new high-volume customers, capitalizing on growth in our targeted markets and extending our serviceable addressable market by continuing to enhance our end-to-end solutions. If we do not execute these strategies successfully, it could adversely impact our revenues and have a negative impact on our operating and net profit margins.
Our business and operations may be negatively affected if we fail to effectively manage our growth.
We have experienced significant growth in a relatively short period of time and intend to continue to grow our business long term. Our revenues have grown from $193.3 million in 2020 to $271.5 million in 2022. Our headcount has increased from 882 as of December 31, 2019, to 934, as of December 31, 2022. We have conducted two Reduction in Force (RIF) initiatives in 2022 resulting in a total reduction of approximately 10% of our total workforce. We plan to continue to hire additional employees selectively and strategically across certain areas of our company as needed, subject to market conditions, in order to return to sustainable, profitable, long-term growth. Our rapid growth over the past three years has placed significant demands on our management, sales and operational and financial infrastructure. Further, in order to manage our future growth effectively, we must continue to improve our IT and financial infrastructure, operating and administrative systems and controls and efficiently manage headcount, capital and processes. In case that we will not successfully implement these improvements in a timely or efficient manner, our failure to do so may materially impact our growth and profitability levels.
Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.
A significant invasion, interruption, destruction or breakdown of our information technology, or IT, systems and/or infrastructure by persons with authorized or unauthorized access could negatively impact our business and operations. We could also experience business interruption, information theft and/or reputational damage from cyber-attacks, which may compromise our systems and lead to data leakage either internally or at our third party suppliers or customers. Both data that has been inputted into our main IT platform, which covers records of customers, end-users of our systems, transactions, financial data, employees, pricing and other data reflected in our results of operations, as well as data related to our proprietary rights (such as research and development, and other intellectual property- related data, including: ink formulas; source code for our systems, software and cloud services; undisclosed plans; and email lists), are subject to material cyber security risks. Our IT systems have been, and are expected to continue to be, the target of malware and other cyber-attacks. To date, we are not aware that we have experienced any loss of, or disruption to, material information as a result of any such malware or cyber-attack. To the extent that a cyber-attack is successful, we estimate that it could result in potential damages to us of up to hundreds of thousands or millions of dollars, depending on the severity of the attack, which is a function of the attack’s impact on our business continuity (that is, the duration of the recovery period) and the nature of the sensitive data that is exposed.
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We have invested in advanced protective systems to reduce our cybersecurity and data protection risks, some of which have been installed and others that are still in the process of installation. In addition, we back up our data regularly. We have designated a special committee to assess our cybersecurity and data protection risks and develop and implement a data security policy. We also created an annual program to ensure our data safety. This program includes self-evaluations, auditing, tests, and third-party evaluation. Based on information provided to us by the suppliers of our protective systems, we believe that our level of protection is in keeping with the customary practices of peer technology companies. We also maintain back-up files for much of our information, as a means of assuring that a breach or cyber-attack does not necessarily cause the loss of that information. We furthermore review our protections and remedial measures periodically in order to ensure that they are adequate, and we carry cybersecurity and data protection insurance coverage in amounts that we believe are customary for a technology company of our size and type, based on information provided by our insurance agent.
Despite these protective systems and remedial measures, techniques used to obtain unauthorized access are constantly changing, are becoming increasingly more sophisticated and often are not recognized until after an exploitation of information has occurred. We may be unable to anticipate these techniques or implement sufficient preventative measures, and we therefore cannot assure you that our preventative measures will be successful in preventing compromise and/or disruption of our information technology systems and related data. We furthermore cannot be certain that our remedial measures will fully mitigate the adverse financial consequences of any cyber-attack or incident.
We have implemented a new enterprise resource planning (ERP) system, and if we encounter any issues with the design or implementation of this system, that could interfere with our business and operations.
We have begun the process of designing and implementing a new ERP system, which we launched on January 1, 2023. This project requires significant capital and human resources, the re-engineering of many processes of our business, and the attention of our management and other personnel who would otherwise be focused on other aspects of our business. The implementation may be more expensive and take longer to fully implement and stabilize the system than we originally plan, resulting in increased capital investment, higher fees and expenses of third parties, delayed deployment scheduling, and more on-going maintenance expense once implemented. Any such delays may disrupt or reduce the efficiency of our entire operations and such additional expenses may have an adverse effect on our operating results and cash flows.
We and our customers are subject to extensive environmental, health and safety laws and regulations which, if not met, could have a material adverse effect on our business, financial condition and results of operations.
Our manufacturing and development facilities use chemicals and produce waste materials, which require us to hold business licenses that may include conditions set by the Ministry of Environmental Protection for the operations of such facilities. We are also subject to extensive environmental, health and safety laws and regulations governing, among other things, the use, storage, registration, handling and disposal of chemicals and waste materials, the presence of specified substances in electrical products, air, water and ground contamination, air emissions and the clean-up of contaminated sites. In the future we may incur expenditure of significant amounts in the event of non-compliance and/or remediation. Furthermore, requirements of environmental laws have adversely affected and may continue to adversely affect the ability of our customers to install and use our systems in a timely manner. If we fail to comply with such laws or regulations, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of our toxin permit, business permits, or other permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury, including exposure to hazardous substances that we use, store, handle, transport, manufacture or dispose of, or property damage. Some environmental, health and safety laws and regulations allow for strict, joint and several liability for remediation costs, regardless of comparative fault. We may be identified as a potentially responsible party under such laws. In addition, our customers may encounter delays in obtaining or be unable to obtain regulatory permits to operate our systems in their facilities, which may result in cancellation or delay of orders of our systems.
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The export of our products internationally subjects us to environmental laws and regulations concerning the import and export of chemicals and hazardous substances. In the European marketplace, electrical and electronic equipment is required to comply with the Directive on Waste Electrical and Electronic Equipment, or WEEE, which aims to prevent waste by encouraging reuse and recycling, and the Directive on Restriction of Use of Certain Hazardous Substances, or RoHS, which restricts the use of ten hazardous substances in electrical and electronic products. Additionally, we are required to comply with certain laws, regulations and directives such as the United States Toxic Substances Control Act, or TSCA, and the Registration, Evaluation, Authorization and Restriction of Chemical Substances, or REACH. These laws and regulations require the testing and registration of some chemicals that we ship along with, or that form a part of, our systems and other products. If we fail to comply with these or similar laws and regulations, we may be required to make significant expenditures to reformulate the chemicals that we use in our products and materials or incur costs to register such chemicals to gain and/or regain compliance. Additionally, we could be subject to significant fines or other civil and criminal penalties should we not achieve such compliance.
Any such developments could have a material adverse effect on our business, financial condition and results of operations. Environmental, health and safety laws and regulations may also change from time to time. Complying with any new requirements may involve substantial costs and could cause significant disruptions to our research, development, manufacturing, and sales.
Achieving our published goals with respect to the environmental impact of our operations and products could result in us incurring additional costs, and our failure to achieve these goals could adversely impact our reputation, employee retention, and willingness of customers to do business with us.
Investor advocacy groups, certain institutional investors, investment funds, lenders and other market participants, shareholders, and customers have focused increasingly on the environmental, social, and governance (ESG) or “sustainability” practices of companies. These parties have placed increased importance on the implications of the social cost of their investments. Our 2021 Impact Report sets out long-term targets with respect to the environmental impact of our operations and products. These targets reflect our current plans and aspirations and are not guarantees that we will be able to achieve them. Our efforts to accomplish and accurately report on these goals and objectives present numerous operational, reputational, financial, legal and other risks, any of which could have a material negative impact. If we do not achieve these targets, or if our ESG practices generally do not meet investor, lender, or other industry stakeholder expectations and standards, which continue to evolve, our reputation and access to capital may be negatively impacted and we could be the subject of government investigations and enforcement actions and private litigation. Our share price and financial results may be adversely affected as a result of such events or if we fail to achieve targets that we have set.
Our 2021 Impact Report discussed our policies and practices on a variety of environmental, social and ethical matters, including corporate governance, climate change risks, environmental compliance, employee health and safety practices, human capital management, and workforce inclusion and diversity. It is possible that stakeholders may be dissatisfied with our ESG practices or the speed of their adoption. We expect to incur additional costs and require additional resources to monitor, report, and comply with various ESG practices. This area is rapidly developing, and a failure or perceived failure by us to set appropriate goals and prioritize ESG practices could negatively impact our reputation, employee retention, and the willingness of our customers to do business with us.
Increasing temperatures as a result of climate change may adversely affect our business and impact our results of operations.
Our operations rely upon cooling processes, which utilize significant energy and electricity resources. Increasing temperatures as a result of climate change could potentially lead to significant increases in our usage of energy and electricity in our operations worldwide, which would cause our expenses to increase. We believe that this risk could materially adversely affect our business, impact our results of operations, and impact our financial condition. As of the current time, we are unable to quantify the potential adverse impact that increased temperatures would have on our results of operations or financial condition, given the multiple variables and unknown factors involved.
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Exchange rate fluctuations between the U.S. dollar and the Israeli shekel, the Euro and other non-U.S. currencies may negatively affect our earnings.
The U.S. dollar is our functional and reporting currency. However, a significant portion of our operating expenses are incurred in Israeli shekels, or NIS. As a result, we are exposed to the risk that the NIS may appreciate relative to the dollar, or, if the NIS instead devalues relative to the dollar, that the inflation rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected. To protect against an increase the dollar-denominated value of expenses paid in NIS during the year, we have instituted a foreign currency cash flow hedging program, which seeks to hedge a portion of the economic exposure associated with our anticipated NIS-denominated expenses using derivative instruments. We expect that the substantial majority of our revenues will continue to be denominated in U.S. dollars for the foreseeable future and that a significant portion of our expenses will continue to be denominated in NIS. We cannot provide any assurances that our hedging activities will be successful in protecting us in full from adverse impacts from currency exchange rate fluctuations since we only plan to hedge a portion of our foreign currency exposure, and we cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS against the dollar For example, based on annual average exchange rates, the NIS appreciated by 3.4% and 6.2% against the dollar in 2020 and 2021, respectively, before depreciating against the dollar by 4.0% in 2022. During these periods, there was deflation of 0.7%, and inflation of 2.8% and 5.3% in Israel in 2020, 2021, and 2022, respectively. If the dollar cost of our operations continues to increase, our dollar-measured results of operations will be adversely affected. See “ITEM 11. Quantitative and Qualitative Disclosures about Market Risk-Foreign Currency Risk.”
In addition, a material portion of our leases are denominated in currencies other than the U.S. dollar, mainly in NIS. In accordance with a lease accounting standard, which became effective on January 1, 2019, the associated lease liabilities will be remeasured using the current exchange rate in future reporting periods, which may result in material foreign exchange gains or losses. See Note 2, “Significant Accounting Policies”, to the consolidated financial statements included in Item 18 of this annual report for more details.
Our business could suffer if we are unable to attract and retain key employees.
Our success depends upon the continued service and performance of our senior management and other key personnel. Our senior executive team is critical to the management of our business and operations, as well as to the development of our strategies. The loss of the services of any of these personnel could delay or prevent the continued successful implementation of our growth strategy, or our commercialization of new applications for our systems and ink and other consumables or could otherwise affect our ability to manage our company effectively and to carry out our business plan. Members of our senior management team may resign at any time. High demand exists for senior management and other key personnel in our industry. There can be no assurance that we will be able to continue to retain such personnel. We have recently experienced changes in senior personnel, notably, our CFO in November 2022, and certain changes in our regional presidents’ roles. To the extent that we experience additional frequent changes in our leadership team (or the leadership teams of our subsidiaries) going forward, that could adversely affect our performance in a material manner.
Our growth and success also depend on our ability to attract and retain additional highly qualified scientific, technical, sales, managerial, operational, HR, marketing and finance personnel. We compete to attract qualified personnel, and, in some jurisdictions in which we operate, the existence of non-competition agreements between prospective employees and their former employers may prevent us from hiring those individuals or subject us to lawsuits from their former employers. While we attempt to provide competitive compensation packages to attract and retain key personnel, some of our competitors have greater resources and more experience than we have, making it difficult for us to compete successfully for key personnel. If we cannot attract and retain sufficiently qualified technical employees for our research and development operations on acceptable terms, we may not be able to continue to competitively develop and commercialize our solutions or new applications for our existing systems. Further, any failure to effectively integrate new personnel could prevent us from successfully growing our company.
Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
We generally enter into non-competition agreements with our employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefiting from the expertise that our former employees or consultants developed while working for us. For example, Israeli labor courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer that have been recognized by the courts, such as the secrecy of a company’s trade secrets or other intellectual property.
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We have a significant presence in international markets and plan to continue to expand our international operations, which exposes us to a number of risks that could affect our future growth.
We have a worldwide sales, marketing and support infrastructure that is comprised of independent distributors and value-added resellers, and our own personnel resulting in a global sales, marketing and support presence, including in North America, Western and Eastern Europe, the Asia Pacific region and Latin America. We continue to evaluate our overall workforce in all areas, including sales, applications development, field support, marketing and engineering and, in some cases, establish new relationships with distributors or channel partners, particularly in markets where we currently do not have a sales or customer support presence. As we continue to expand our international sales and operations, we are subject to a number of risks, including the following:
| ● | greater difficulty in enforcing contracts and accounts receivable collection, as well as longer collection periods; | |
| ● | increased expenses incurred in establishing and maintaining office space and equipment for our international operations; |
| ● | fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business; | |
| ● | greater difficulty in recruiting local experienced personnel, and the costs and expenses associated with such activities; | |
| ● | general economic and political conditions in these foreign markets; | |
| ● | management communication and integration problems resulting from cultural and geographic dispersion; | |
| ● | potential disruption to the supply of certain of our raw materials for our products that are sourced in countries impacted by the coronavirus outbreak, due to the slowdown in activity there (although our products are manufactured in Israel only); | |
| ● | potential adverse impact to our revenues in particular countries or regions in which the coronavirus continues to have a negative impact, which has reduced economic activity in those markets, particularly in the Asia Pacific region; |
| ● | the impact of Russia’s invasion of Ukraine in February 2022 and trade and monetary sanctions in response to such developments on the markets in which we operate; | |
| ● | risks associated with trade restrictions and foreign legal requirements, including the importation, certification, and localization of our solutions required in foreign countries, such as high import taxes in Brazil and other Latin American markets where we sell our products; |
| ● | greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties; |
| ● | the uncertainty of protection for intellectual property rights in some countries; |
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| ● | greater risk of a failure of employees to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt Practices Act, or FCPA, the European Union General Data Protection Regulation, or GDPR (which broadened the scope of personal privacy laws to protect the rights of European Union citizens and requires organizations to report on data breaches promptly and obtain the consent of individuals on how their data can be used), the California Consumer Privacy Act, or CCPA (which imposes enhanced disclosure requirements for us vis-à-vis our interactions with customers that are residents of California), and any trade regulations ensuring fair trade practices; and | |
| ● | heightened risk of unfair or corrupt business practices in certain regions and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, or irregularities in, financial statements. |
Any of these risks could adversely affect our international operations, reduce our revenues from outside the United States or increase our operating costs, adversely affecting our business, results of operations and financial condition and growth prospects. There can be no assurance that all of our employees and channel partners will comply with the formal policies that we have in place and/or will implement, or applicable laws and regulations. Violations of laws or key control policies by our employees and channel partners could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our software and services and could have a material adverse effect on our business and results of operations.
We manufacture and sell products that may create exposure to product liability, warranty liability, or personal injury claims and litigation that may harm our business and results of operations.
Product quality and safety issues could negatively impact consumer confidence in our brand and our business. Our products may not successfully achieve applicable safety standards or customers’ expectations regarding safety or quality. Our products may contain or, be alleged to contain, components containing hazardous materials that may present certain health, safety, or quality concerns. Additionally, from time to time, system errors and/or deficiencies may be discovered in the design, manufacturing, assembling, labeling and product formulations of our systems, ink, and other consumables, and associated software. Hazardous materials, errors, and/or deficiencies may also be identified in materials, components, and systems produced by others and used with or incorporated into our products. Some of these issues may not be apparent until after certain products are installed or used by customers, including in circumstances where a product is first introduced, or a new version is released. We expect that these errors or defects will be found from time to time in new or enhanced systems after commencement of commercial distribution or upon software upgrades.
To the extent that any error, deficiency, or hazardous component (which presents a safety concern) exists in any of our products and is not discovered and corrected before a product is introduced to the market, such product could be unsafe and/or could cause damage, including property damage, personal injury, or death. In such circumstances, the actual, potential, or perceived product safety concerns and/or defects in the manufacturing or design, a failure to warn of dangers inherent in the product, negligence, or strict liability could expose us to litigation relating to product liability, warranty liability, or personal injury, as well as government enforcement actions.
Such litigation could force us to incur significant expenses, divert management’s time and attention, subject us to adverse publicity, and damage our reputation and competitive position. A successful assertion of a claim against us may result in potentially significant monetary damages, penalties, or fines and adversely affect sales of our products. Although we carry insurance policies covering this type of liability, these policies may not provide sufficient protection should a claim be asserted against us. In addition, costs or payments made in connection with warranty and product liability claims and system recalls could adversely affect our financial condition and results of operations in a material manner. Product liability claims, injuries, defects, or other problems experienced by other companies in the digital printing industry could lead to unfavorable market conditions for the industry as a whole.
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We may need substantial additional capital in the future, which may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to our pipeline products or intellectual property. If additional capital is not available, we may have to delay our expansion plans or reduce operations.
Based on our current business plan, we believe our cash flows from operating activities and our existing cash resources will be sufficient to meet our currently anticipated cash requirements through the next 12 months without drawing on our lines of credit or using significant amounts of the net proceeds from our initial public offering and follow-on offerings. We raised $339.8 million of aggregate net proceeds from our November 2021 follow-on public offering, and had approximately $646.0 million in cash, cash equivalents, short term deposits and marketable securities as of December 31, 2022. Nevertheless, to the extent our anticipated cash requirements change due to our expansion plans or otherwise, we may seek additional funding in the future. This funding may consist of equity offerings, debt financings or any other means to expand our sales and marketing capabilities, develop our future solutions or pursue other general corporate purposes. Securing additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to market our current solutions and develop and sell future solutions. Additional funding may not be available to us on acceptable terms, or at all.
To the extent that we raise additional capital through, for example, the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. The incurrence of indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our ordinary shares to decline.
We have acquired businesses and may acquire other businesses and/or companies, which could require significant management attention, disrupt our business, dilute shareholder value, and adversely affect our results of operations.
As part of our business strategy, we have acquired businesses and may acquire or make investments in other complementary companies, products or technologies. For example, in August 2020 and in August 2021 we acquired Custom Gateway (a provider of cloud-based software workflow solutions for both B2B and B2C business models), which currently operates under the name KornitX, and the assets of Voxel8 (which possessed advanced additive manufacturing technology for textiles), respectively. In January 2022, we announced our agreement to acquire Tesoma (a provider of curing solutions), and closed the acquisition in April 2022. Our experience in acquiring and integrating other companies, products or technologies is limited. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. If we complete other acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by our customers, analysts and investors. In addition, if we are unsuccessful at integrating such acquisitions or the technologies associated with such acquisitions, our revenues and results of operations may be adversely affected. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our ordinary shares. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.
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We may be subject to additional tax liabilities in the future as a result of audits of our tax returns.
We are subject to income taxes principally in Israel, Germany, Hong-Kong, United Kingdom, Japan and the United States. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes, and if the relevant tax authority does not agree with the positions that we take, we could be subject to tax audit and face significant tax liabilities, which could have a material adverse effect on our results of operations. We were recently subject to such a tax audit for the years 2020 to 2021 by the Israeli Tax Authority, or ITA, in respect of which we ultimately reached a settlement with the ITA. We account for income taxes in accordance with ASC 740, “Income Taxes.” ASC 740, which prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax basis of assets and liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse.
We account for uncertain tax positions in accordance with ASC 740-10 two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative probability) likely to be realized upon ultimate settlement. We currently maintain reserves for uncertain tax positions. If the potential tax liabilities in respect of which we have taken these reserves exceed the amount of those reserves, that may have a material adverse effect on our results of operations. For more information on our tax positions please refer to Note 14 to our financial statements that appear in Item 18 of this annual report.
We are subject to risks associated with the provision of KornitX cloud-based software
On August 7, 2020, we closed the acquisition of Custom Gateway, a leading global provider of cloud-based software workflow solutions for both B2B and B2C business models. The Custom Gateway acquisition provided the basis for the creation of KornitX. KornitX has approximately 166 customers, including leading brands, retailers, and fulfillers. Prior to our acquisition of Custom Gateway, we had not offered customers a subscription or other-based software or service to manage on-demand production. We do not expect the KornitX offering to have a material impact on our overall results of operations in the very near term; however, we believe that it nonetheless exposes us to a number of potential risks, including the following:
| ● | software bugs and defects that adversely impact our customer’s production processes; |
| ● | unauthorized access, data breaches and/or loss of customer data, including data regarding payment methods; |
| ● | use of unauthorized open source software or other infringements of third-party intellectual property; |
| ● | challenges providing support to software users; and | |
| ● | challenges related to our required delivery of the service level agreements under the virtual supplier model that we utilize for our KornitX offering. |
If any of the foregoing risks materializes, our reputation may be adversely impacted, which could, in turn, adversely impact sales of our products and diminish customer confidence in us.
We are subject to litigation. Any current or future lawsuits to which we are subject may have a significant adverse effect on our financial condition or profitability.
We are currently subject to securities class action litigation (as described below in “ITEM 8.A Financial Information— Legal Proceedings— Securities Class Action Lawsuit”) and could be subject to further litigation in the future.
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We can provide no assurance as to the outcome of any current or future lawsuits, and any such actions may result in judgments against us for significant damages. Resolution of any such matters can be prolonged and costly, and the ultimate results or judgments are uncertain due to the inherent uncertainty in litigation and other proceedings. Moreover, our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements. Regardless of the outcome, litigation has resulted in the past, and may result in the future, in significant legal expenses and require significant attention and resources of management. As a result, any present or future litigation could result in losses, damages and expenses that have a significant adverse effect on our financial condition or profitability.
Risks Related to Intellectual Property
If we are unable to obtain patent protection for our solutions or otherwise protect our intellectual property rights, our business could suffer.
The success of our business depends on our ability to protect our proprietary technology, brand owners and other intellectual property and to enforce our rights in that intellectual property. We attempt to protect our intellectual property under patent, trademark, copyright and trade secret laws, and through a combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection.
As of December 31, 2022, we owned 49 issued patents in the United States and 30 provisional or pending U.S. patent applications, along with 34 pending non-U.S. patent applications. We also had 30 patents issued in non-U.S. jurisdictions, and 16 pending Patent Cooperation Treaty patent applications, which are counterparts of our U.S. patent applications. The non-U.S. jurisdictions in which we have issued patents or pending applications are China, the European Union or European countries of the European Union, Hong Kong, Israel, Canada, Australia, Republic of Korea, South Africa, Brazil, Japan and India. We may file additional patent applications in the future. The process of obtaining patent protection is expensive, time-consuming, and uncertain, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner all the way through to the successful issuance of a patent. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Furthermore, it is possible that our patent applications may not issue as granted patents, that the scope of our issued patents will be insufficient or not have the coverage originally sought, that our issued patents will not provide us with any competitive advantages, and that our patents and other intellectual property rights may be challenged by others through administrative processes or litigation resulting in patent claims being narrowed, invalidated, or unenforceable. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented invention. Our policy is to require our employees (and our consultants and service providers, including third-party manufacturers of our systems and components, that develop intellectual property included in our systems) to execute written agreements in which they assign to us their rights in potential inventions and other intellectual property created within the scope of their employment (or, with respect to consultants and service providers, their engagement to develop such intellectual property), but we cannot assure you that we have adequately protected our rights in every such agreement or that we have executed an agreement with every such party. Finally, in order to benefit from the protection of patents and other intellectual property rights, we must monitor and detect infringement and pursue infringement claims in certain circumstances in relevant jurisdictions, all of which are costly and time-consuming. As a result, we may not be able to obtain adequate protection or to effectively enforce our issued patents or other intellectual property rights.
In addition to patents, we rely on trade secret rights, copyrights, trademarks, and other rights to protect our proprietary intellectual property and technology. Despite our efforts to protect our proprietary intellectual property and technology, unauthorized parties, including our employees, consultants, service providers or customers, may attempt to copy aspects of our solutions or obtain and use our trade secrets or other confidential information. We generally enter into confidentiality agreements with our employees, consultants, service providers, vendors, channel partners and customers, and generally limit access to and distribution of our proprietary information and proprietary technology through certain procedural safeguards. These agreements may not effectively prevent unauthorized use or disclosure of our intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our intellectual property or technology. We cannot assure that the steps taken by us will prevent misappropriation of our intellectual property or technology or infringement of our intellectual property rights. In addition, the laws of some foreign countries where we sell or distribute our solutions do not protect intellectual property rights and technology to the same extent as the laws of the United States, and these countries may not enforce these laws as diligently as government agencies and private parties in the United States. Based on the 2022 report on intellectual property rights protection and enforcement published by the Office of the United States Trade Representative, such countries included Argentina, Chile, China, India, Indonesia, Russia, and Venezuela (designated as priority watch list countries).
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If we are unable to protect our trademarks from infringement, our business prospects may be harmed.
We own trademarks that identify “Kornit”, “NeoPigment”, the “K” logo and “Konnect” logo, and we have an additional trademark registration for the “Custom Gateway” logo, among others, and have registered these trademarks in certain key markets. We further own trademark registrations and applications for VOXEL8, VOXEL8 logo, ACTIVEIMAGE, ACTIVELAB and ACTIVEMIX in certain key markets. Although we take steps to monitor the possible infringement or misuse of our trademarks, third parties may violate our trademark rights. Any unauthorized use of our trademarks could harm our reputation or commercial interests. Efforts to enforce our trademarks may be expensive and time-consuming and may not effectively prevent infringement.
We may not register our trademark rights in all the markets in which we sell our products, and our application to register our trademarks in various jurisdictions may be opposed by third parties (as has occurred in the past), which could require investment of additional time and resources on our part in order to secure registration of those rights. If we do not succeed, our trademarks will be exposed to infringement in a particular jurisdiction, which could have various adverse effects on our operations in that jurisdiction.
We may become subject to claims of intellectual property infringement by third parties or claims by third parties that our intellectual party rights are invalid and may be required to indemnify our distributors or other third parties against such claims, which, regardless of their merit, could result in litigation, distract our management and materially adversely affect our business, results of operations or financial condition.
We have in the past and may in the future become subject to third-party claims that assert that our solutions, services and intellectual property infringe, misappropriate or otherwise violate third-party intellectual property or other proprietary rights. We, in turn, will seek to assert the validity of our intellectual property rights by any legal means that we deem necessary or appropriate in response to any actual or perceived threats.
Intellectual property disputes can be costly and disruptive to our business operations by diverting the attention and energies of management and key technical personnel, and by increasing our costs of doing business. Even if a claim is not directly against us, our agreements with distributors generally require us to indemnify them against losses from claims that our products infringe third-party intellectual property rights and entitle us to assume the defense of any claim as part of the indemnification undertaking. Our assumption of the defense of such a claim may result in similar costs, disruption and diversion of management attention to that of a claim that is asserted directly against us. We may not prevail in any such dispute or litigation, and an adverse decision in any legal action involving intellectual property rights could harm our intellectual property rights and the value of any related technology or limit our ability to execute our business.
Adverse outcomes in intellectual property disputes could:
| ● | require us to redesign our technology or force us to enter into costly settlement or license agreements on terms that are unfavorable to us; | |
| ● | prevent us from manufacturing, importing, using, or selling some or all of our solutions; | |
| ● | disrupt our operations or the markets in which we compete; | |
| ● | impose costly damage awards; |
| ● | require us to indemnify our distributors and customers; and |
| ● | require us to pay royalties. |
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We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.
A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result of or arising from his or her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee proprietary rights. The Patent Law also provides under Section 134 that if there is no agreement between an employer and an employee as to whether the employee is entitled to consideration for service inventions, and to what extent and under which conditions, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine these issues. Section 135 of the Patent Law provides criteria for assisting the Committee in making its decisions. According to case law handed down by the Committee, an employee’s right to receive consideration for service inventions is a personal right and is entirely separate from the proprietary rights in such invention. Therefore, this right must be explicitly waived by the employee. A decision handed down in May 2014 by the Committee clarifies that the right to receive consideration under Section 134 can be waived and that such waiver can be made orally, in writing or by behavior like any other contract. The Committee will examine on a case-by-case basis, the general contractual framework between the parties, using interpretation rules of the general Israeli contract laws. Further, the Committee has not yet determined one specific formula for calculating this remuneration, nor the criteria or circumstances under which an employee’s waiver of his right to remuneration will be disregarded. Similarly, it remains unclear whether waivers by employees in their employment agreements of the alleged right to receive consideration for service inventions should be declared as void being a depriving provision in a standard contract. We generally enter into assignment-of-invention agreements with our employees pursuant to which such individuals assign to us all rights to any inventions created in the scope of their employment or engagement with us. Although our employees have agreed to assign to us service invention rights and have specifically waived their right to receive any special remuneration for such service inventions beyond their regular salary and benefits, we may face claims demanding remuneration in consideration for assigned inventions.
Risks Related to Our Ordinary Shares
Our share price may be volatile.
Our ordinary shares were first offered publicly in our initial public offering in April 2015 at a price of $10.00 per share, and our ordinary shares have subsequently traded as high as $181.38 and as low as $8.10 through March 15, 2023. The market price of our ordinary shares may continue to fluctuate substantially as a result of many factors, including:
| ● | actual or anticipated variations in our and/or our competitors’ results of operations and financial condition; | |
| ● | variance in our financial performance from the expectations of market analysts; | |
| ● | announcements by us or our competitors of significant business developments, changes in service provider relationships, acquisitions, strategic relationships or expansion plans; | |
| ● | changes in the prices of our solutions; | |
| ● | our involvement in litigation; | |
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| ● | our sale of ordinary shares or other securities in the future; | |
| ● | market conditions in our industry; | |
| ● | changes in key personnel; | |
| ● | the trading volume of our ordinary shares; | |
| ● | changes in the estimation of the future size and growth rate of our markets; and | |
| ● | general economic and market conditions; |
In addition, recently, the stock markets have experienced extreme price and volume fluctuations. Broad market and industry factors may materially harm the market price of our ordinary shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. We, too, along with certain of our current and former executives, and, in one case, our directors, the underwriters for our November 2021 follow-on public offering and Amazon, have recently been made subject to such securities class action litigation, which allege that our ordinary shares traded at artificially inflated prices during certain periods (one action identifies the period between February 2021 and July 2022, while the second action identifies the period between August 2021 and July 2022, along with our November 2021 follow-on public offering in particular). If these actions or any similar litigation against us are not dismissed or settled at their early stages, we could incur substantial costs and our management’s attention and resources could be diverted. Furthermore, share price volatility may impact the fair value of the warrants granted to Amazon and as a result may impact revenues and profits.
We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid cash dividends on our share capital, nor do we anticipate paying any cash dividends on our share capital in the foreseeable future. We currently intend (subject to any extraordinary market conditions that might arise) to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares should be investors’ principal expected source of gain for the foreseeable future. To the extent that volatile or depressed market conditions reduce the trading price of our ordinary shares substantially for an extended period of time, we may potentially consider using a portion of our cash reserves for share repurchases, as we have done under a share repurchase plan of up to US$ 75 million approved by the Israeli court in December 2022. In addition to considerations related to corporate finance, Israeli law limits our ability to declare and pay dividends and may subject our dividends to Israeli withholding taxes.
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As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we may follow certain home country corporate governance practices instead of otherwise applicable SEC and Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the corporate governance standards for U.S. domestic issuers. We currently follow Israeli home country practices with regard to the (i) quorum requirement for shareholder meetings (25%, which is less than the one-third minimum required under the Nasdaq rules) and (ii) independent director oversight requirement for director nominations (the board as a whole, rather than an entirely independent nominating committee or only the independent directors, handles this under Israeli law). See “ITEM 16G. Corporate Governance.” Furthermore, we may in the future elect to follow Israeli home country practices in lieu of the Nasdaq requirements on other matters, such as the requirement to hold separate executive sessions of independent directors or to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq corporate governance rules. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on Nasdaq may provide less protection than is accorded to investors of domestic issuers. See “ITEM 16G. Corporate Governance.”
As a foreign private issuer, we are not subject to the provisions of Regulation FD or U.S. proxy rules and are exempt from filing certain Exchange Act reports.
As a foreign private issuer, we are exempt from a number of requirements under U.S. securities laws that apply to public companies that are not foreign private issuers. In particular, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act and we are generally exempt from filing quarterly reports with the SEC under the Exchange Act. We are also exempt from the provisions of Regulation FD, which prohibits issuers from making selective disclosure of material nonpublic information to, among others, broker-dealers and holders of a company’s securities under circumstances in which it is reasonably foreseeable that the holder will trade in the company’s securities on the basis of the information. These exemptions and leniencies will reduce the frequency and scope of information and protections to which you are entitled as an investor.
We are not required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement applicable to emerging growth companies to disclose the compensation of our Chief Executive Officer and other two most highly compensated executive officers on an individual, rather than on an aggregate, basis. Nevertheless, the Companies Law requires us to disclose in the notice of convening an annual general meeting the annual compensation of our five most highly compensated office holders on an individual basis, rather than on an aggregate basis, as was previously permitted for Israeli public companies listed overseas. This disclosure is not as extensive as that required of a U.S. domestic issuer.
We would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents, and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose more detailed information about the compensation of our senior executive officers on an individual basis. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we would lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
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The market price of our ordinary shares could be negatively affected by future sales of our ordinary shares.
Future sales by us or our shareholders of a substantial number of ordinary shares in the public market, or the perception that these sales might occur, could cause the market price of our ordinary shares to decline or could impair our ability to raise capital through a future sale of, or to pay for acquisitions using, our equity securities.
Amazon is entitled to certain registration rights with respect to the 3,401,028 ordinary shares underlying new warrants that we issued to its affiliate on September 14, 2020, pursuant to a transaction agreement that we entered into with Amazon on that day. All shares sold pursuant to an offering covered by a registration statement will be freely transferable except if purchased by an affiliate. See “ITEM 10.C- Material Contracts- Agreements with Amazon- Transaction Agreement and Warrant” in this annual report.
In addition, 339,777 ordinary shares are issuable under currently vested and exercisable share options granted to employees and office holders as of December 31, 2022. We have filed registration statements on Form S-8 under the Securities Act registering our potential issuance of those ordinary shares under our share incentive plans, of which, as of December 31, 2022, there were options, restricted share units and warrants to purchase 3,234,531 shares outstanding. Shares included in such registration statements may be freely sold in the public market upon issuance, except for shares held by affiliates who have certain restrictions on their ability to sell.
As a public company, we are required to devote substantial time towards maintaining the effectiveness of our internal controls and to other compliance initiatives and corporate governance practices.
As a public company, and to a greater extent once we lost our status as an emerging growth company, we incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Stock Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel continue to devote a substantial amount of time to these compliance initiatives.
In particular, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our annual reports and provide an annual management report on the effectiveness of control over financial reporting. Additionally, as we are no longer an emerging growth company and qualify as a large, accelerated filer, we must include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.
To maintain the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, we expect that we will need to continue enhancing existing, and implement new, financial reporting and management systems, procedures and controls to manage our business effectively and support our growth in the future. The process of evaluating our internal control over financial reporting requires an investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. Additionally, as part of management assessments of the effectiveness of our internal control over financial reporting required by Section 404(a) of the Sarbanes-Oxley Act, our management may conclude that our internal control over financial reporting is not effective due to our failure to cure any identified material weakness or otherwise, which would require us to employ remedial actions to implement effective controls. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404(a) or 404(b) in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion or issues an adverse opinion in its attestation as to the effectiveness of our internal control over financial reporting required by Section 404(b), investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our ordinary shares could be negatively affected. We could also become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
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Irrespective of compliance with Sections 404(a) and 404(b), any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. In order to implement changes to our internal control over financial reporting triggered by a failure of those controls, we could experience higher than anticipated operating expenses, as well as higher independent auditor fees during and after the implementation of these changes.
Our U.S. shareholders may suffer adverse tax consequences if we are classified as a passive foreign investment company.
Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be determined in part by the market value of our ordinary shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Based on historic and certain estimates of our gross income, gross assets and market capitalization (which may fluctuate from time to time) and the nature of our business, we believe we were not a PFIC for the taxable year ended December 31, 2022, and we do not expect that we will be classified as a PFIC for the taxable year ending December 31, 2023. However, because PFIC status is based on our income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for our 2023 taxable year until after the close of the year. Furthermore, because the value of our gross assets is likely to be determined in part by reference to our market capitalization, a decline in the value of our ordinary shares may result in our becoming a PFIC. There can be no assurance that we will not be considered a PFIC for any taxable year. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than as capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. Holders (as defined in “ITEM 10.E Taxation and Government Programs-U.S. Federal Income Taxation”), and having interest charges apply to distributions by us and the proceeds of sales of our ordinary shares. Certain elections exist that may alleviate some of the adverse consequences of PFIC status and would result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares. For a more detailed discussion, see “ITEM 10.E Taxation and Government Programs - U.S. Federal Income Taxation - Passive Foreign Investment Company Considerations.”
Certain U.S. holders of our ordinary shares may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized as a “controlled foreign corporation”, or a CFC, under Section 957(a) of the Internal Revenue Code of 1986, as amended, or the Code.
A non-U.S. corporation is considered a CFC if more than 50 percent of (1) the total combined voting power of all classes of stock of such corporation entitled to vote, or (2) the total value of the stock of such corporation; is owned, or is considered as owned by applying certain constructive ownership rules, by United States shareholders who own stock representing 10% or more of the vote or 10% or more of the value on any day during the taxable year of such non-U.S. corporation (“10% U.S. Shareholders”). Generally, a 10% U.S. Shareholder of a CFC is required to include currently in gross income such 10% U.S. Shareholder’s share of the CFC’s “Subpart F income”, a portion of the CFC’s earnings to the extent the CFC holds certain U.S. property, and certain other items under the Tax Cuts and Jobs Act of 2017, or the Tax Act. Such 10% U.S. Shareholders are subject to current U.S. federal income tax with respect to such items, even if the CFC has not made an actual distribution to such shareholders. “Subpart F income” includes, among other things, certain passive income (such as income from dividends, interests, royalties, rents and annuities or gain from the sale of property that produces such types of income) and certain sales and services income arising in connection with transactions between the CFC and a person related to the CFC.
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Certain changes to the CFC constructive ownership rules introduced by the Tax Act may cause one or more of our non-U.S. subsidiaries to be treated as CFCs, may also impact our CFC status and, thus, may affect holders of our common shares that are United States shareholders. For 10% U.S. Shareholders, this may result in adverse U.S. federal income tax consequences, such as current U.S. taxation of Subpart F income and of any such shareholder’s share of our accumulated non-U.S. earnings and profits (regardless of whether we make any distributions), taxation of amounts treated as global intangible low-taxed income under Section 951A of the Code with respect to such shareholder, and being subject to certain reporting requirements with the U.S. Internal Revenue Service. Any 10% U.S. Shareholder should consult its own tax advisors regarding the U.S. tax consequences of acquiring, owning, or disposing our common shares and the impact of the Tax Act, especially the changes to the rules relating to CFCs.
If equity research analysts do not publish research or reports about our business or if analysts, including short sellers, issue unfavorable commentary or downgrade our ordinary shares, the price of our ordinary shares could decline. Additionally, we may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our ordinary shares to decline in value.
The trading market for our ordinary shares relies in part on the research and reports that equity research analysts publish about us, our business and our markets. The price of our ordinary shares could decline if one or more securities analysts downgrade our ordinary shares or if one or more of those analysts issue other unfavorable commentary or cease publishing reports about us or our business. The market price for our ordinary shares has been in the past, and may be in the future, materially and adversely affected by allegations made in reports issued by short sellers regarding our business model, our management and our financial accounting. If our financial results for a particular period do not meet our guidance or if we reduce our guidance for future periods, the market price of our ordinary shares may decline.
Risks Related to Our Operations in Israel
Our headquarters, manufacturing and other significant operations are located in Israel and, therefore, our results may be adversely affected by political, economic and military instability in Israel.
Our headquarters, research and development and manufacturing facility, and the primary manufacturing facilities of our third-party manufacturers, are located in Israel. In addition, the majority of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. In recent years, these have included hostilities between Israel and Hezbollah in Lebanon and Hamas in the Gaza Strip, both of which resulted in rockets being fired into Israel, causing casualties and disruption of economic activities. In the latest round of hostilities, which took place in May 2021, some Israeli Arabs participated in attacks within Israel at the same time at which Hamas attacked Israel, which opened up an internal front within Israel that could potentially recur in the future and further destabilize the economic environment within Israel during a military conflict. In addition, Iran has threatened to attack Israel and has been developing a nuclear program. Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business. While we have commenced implementation of a business continuity plan which provides for alternative sites outside of Israel, there can be no assurance that such plan will be successful. Any armed conflict involving Israel could adversely affect our operations and results of operations.
Further, our operations could be disrupted by the obligations of personnel to perform military service. As of December 31, 2022, we had 517 employees based in Israel, certain of whom may be called upon to perform up to 54 days in each three year period (and in the case of non-officer commanders or officers, up to 70 or 84 days, respectively, in each three year period) of military reserve duty until they reach the age of 40 (and in some cases, depending on their specific military profession, up to 45 or even 49 years of age) and, in certain emergency circumstances, may be called to immediate and unlimited active duty. Our operations could be disrupted by the absence of a significant number of employees related to military service, which could materially adversely affect our business and results of operations.
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Several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies. While some of these countries are eliminating these constraints, additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or increases. Although the recent Abraham Accords have enhanced Israel’s relations with certain countries in the Middle East (i.e., the United Arab Emirates, Bahrain, Morocco and Sudan), an ongoing state of hostility vis-à-vis other countries, varying in degree and intensity, has caused security and economic challenges for Israel. In addition, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods based on Israeli government policies. Such actions, particularly if they become more widespread, may adversely impact our ability to sell our solutions.
In addition, the shipping and delivery of our systems and ink and other consumables from our manufacturing facilities and those of our third-party manufacturers in Israel could be delayed or interrupted by political, economic, military, and other events outside of our reasonable control, including labor strikes at ports in Israel or at ports of destination, military attacks on transportation facilities or vessels, and severe weather events. If delivery and installation of our products is delayed or prevented by any such events, our revenues could be materially and adversely impacted.
The Israeli government is currently pursuing extensive changes to Israel’s judicial system. In response to the foregoing developments, individuals, organizations and institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment in Israel including due to reluctance of foreign investors to invest or transact business in Israel as well as to increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in security markets, and other changes in macroeconomic conditions. To the extent that any of these negative developments do occur, they may have an adverse effect on our business, our results of operations and our ability to raise additional funds, if deemed necessary by our management and board of directors.
The tax benefits that are available to us under Israeli law require us to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.
We are eligible for certain tax benefits provided to “Benefited Enterprises” under the Israeli Law for the Encouragement of Capital Investments, 1959, or the Investments Law, until 2018. Beginning in January 2019, and with respect to our taxable results from 2019 onwards, we and our Israeli subsidiary are furthermore eligible to apply the terms of the Investments Law as they relate to a “Preferred Enterprise,” or PE, and/or a “Preferred Technological Enterprise,” or PTE. In order to remain eligible for the tax benefits for Benefited Enterprises for our Israeli subsidiary’s taxable results until 2018, and for its taxable results from 2019 onwards with respect to a PE or PTE, we must continue to meet certain conditions stipulated in the Investments Law and its regulations, as amended. If these tax benefits are reduced, cancelled, or discontinued, our Israeli taxable income would be subject to regular Israeli corporate tax rates and we may be required to refund any tax benefits that we have already received, plus interest and penalties thereon. The statutory corporate tax rate for Israeli companies is 23% from January 1, 2018, and onward. Additionally, if we increase our activities outside of Israel through acquisitions or otherwise through our Israeli subsidiary, our existing or expanded activities might not be eligible for inclusion in existing or future Israeli tax benefit programs. The Israeli government may furthermore independently determine to reduce, phase out, or eliminate entirely the benefit programs under the Investments Law, regardless of whether we then qualify for benefits under those programs at the time, which would also adversely affect our global tax rate and our results of operations. See “ITEM 5. Operating and Financial Review and Prospects- Taxation and Israeli Government Programs Applicable to our Company - Law for the Encouragement of Capital Investments, 5719-1959.”
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We have received and may receive further Israeli government grants for certain research and development activities. The terms of those grants restrict our ability to transfer manufacturing operations or technology outside of Israel.
Our research and development efforts have been financed in part through grants from the Israeli National Authority for Technological Innovation, or the Innovation Authority (previously known as the Israeli Office of the Chief Scientist). Prior to 2015, we received various grants from the Innovation Authority, all of which we repaid. In 2020, 2021 and 2022, we received new commitments from the Innovation Authority for non-royalty bearing grants to reimburse us for up to 55% of our research and development expenses in connection with our projects, in amounts of NIS 1.97 million, NIS 2.02 million and NIS 3.15 million, respectively (approximately $0.61 million, $0.65 million and $0.94 million), in the aggregate. To date, we have received from the Innovation Authority NIS 4.96 million (approximately $1.48 million) of this new committed amount. We must comply with the requirements of the Encouragement of Research, Development and Technological Innovation in the Industry Law, 5744-1984 (formerly known as the Law for the Encouragement of Research and Development in Industry 5744-1984), and related regulations, collectively referred to as the Innovation Law, in connection with that new funding and any past funding that we had received from the Innovation Authority.
When a company develops know-how, technology or products and related services using grants provided by the Innovation Authority, the terms of those grants and the Innovation Law, among others, restrict the transfer outside of Israel of (i) such Innovation Authority-supported know-how (including by a way of license for research and development purposes), (ii) manufacturing or manufacturing rights of such products, and (iii) such technologies, without the prior approval of the Innovation Authority. We may not receive those approvals.
The restrictions set forth under the Innovation Law, to which we are subject (even after repaying grants we have received) include:
| ● | Transfer of know-how outside of Israel. Transfer of the know-how that was developed with the funding of the Innovation Authority outside of Israel requires prior approval of the Innovation Authority, and, if approved, will require the payment of a redemption fee, which cannot exceed 600% of the grant amount plus interest. Upon payment of such fee, the know-how and the production rights for the products supported by such funding cease to be subject to the Innovation Law. | |
| ● | Local manufacturing obligation. The terms of the grants under the Innovation Law require that the manufacturing of products resulting from the Innovation Authority funded programs are carried out in Israel, unless a prior written approval of the Innovation Authority is obtained. Such approval may be given in special circumstances and upon the fulfillment of certain conditions set forth in the Innovation Law, including payment of increased royalties. Such approval is not required for the transfer of less than 10% of the manufacturing capacity in the aggregate, and in such an event, a notice to the Innovation Authority is required. |
| ● | Certain reporting obligations. A recipient of a grant or a benefit under the Innovation Law is required to notify the Innovation Authority of events enumerated in the Innovation Law. |
These restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer manufacturing activities with respect to any product or technology outside of Israel; however, they do not restrict the export of our products that incorporate know-how funded by the Innovation Authority. Furthermore, the consideration available to our shareholders in a sale transaction involving the actual transfer outside of Israel of technology or know-how developed with funding by the Innovation Authority pursuant to a merger or similar transaction may be reduced by any amounts that we are required to pay to the Innovation Authority. Failure to comply with the requirements under the Innovation Law may subject us to mandatory repayment of grants received by us, together with interest and penalties, as well as expose us to criminal proceedings.
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Provisions of Israeli law and our articles may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, even when the terms of such a transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital, otherwise, the acquirer may not own more than 90% of a company’s issued and outstanding share capital. Completion of the tender offer also requires approval of a majority in number of the offerees that do not have a personal interest in the tender offer, unless at least 98% of the company’s outstanding shares are tendered. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer (unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek appraisal rights), may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition. See “Articles of Association - Acquisitions under Israeli Law” in Exhibit 2.2 to this annual report.
Our articles provide that our directors (other than external directors, to the extent there are any serving at the time) are elected on a staggered basis, such that a potential acquirer cannot readily replace our entire board of directors at a single annual general shareholder meeting.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers involving an exchange of shares, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions in which the sellers receive shares in the acquiring entity that are publicly traded on a stock exchange, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of such shares has occurred. In order to benefit from the tax deferral, a pre-ruling from the Israel Tax Authority, or the ITA, might be required.
It may be difficult to enforce a judgment of a U.S. court against us or our officers and directors, to assert U.S. securities laws claims in Israel or to serve process on our officers and directors.
We are incorporated in Israel. The majority of our directors and executive officers reside outside of the United States, and most of our assets and most of the assets of these persons are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a U.S. or foreign court. It may be difficult to enforce a judgment of a U.S. court against us, our officers and directors or the Israeli experts named in this prospectus supplement in Israel or the United States, to assert U.S. securities laws claims in Israel or to serve process on our officers and directors and these experts.
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Your rights and responsibilities as a shareholder are governed by Israeli law, which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.
The rights and responsibilities of the holders of our ordinary shares are governed by our articles and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
ITEM 4. Information on the Company.
| A. | History and Development of the Company |
Our History
Our legal name is Kornit Digital Ltd., and we were incorporated under the laws of the State of Israel on January 16, 2002. We shipped our first system in 2005. In April 2015, we completed our initial public offering, or IPO, pursuant to which we sold 8.165 million ordinary shares for aggregate gross proceeds of $81.65 million, before underwriting discounts, commissions and expenses. Our ordinary shares began trading on the Nasdaq Global Select Market, under the symbol “KRNT,” on April 2, 2015. On January 31, 2017, June 18, 2019, September 21, 2020, and November 23, 2021, we completed follow-on offerings pursuant to which we sold approximately 2.3 million, 5.0 million, 3.0 million and 2.3 million ordinary shares, respectively, for aggregate gross proceeds of $38.0 million, $137.3 million, $168.0 million and $352.9 million, respectively, before underwriting discounts, commissions and expenses. In addition, on September 21, 2020, and November 23, 2021, Amazon sold approximately 1.7 million and 0.7 million ordinary shares, respectively, pursuant to exercising of their warrants, for aggregate gross proceeds of $95.0 million and $102.9 million, respectively.
As of December 31, 2022, we had approximately 1,300 active customers globally. As of December 31, 2022, we had 934 employees located primarily across four regions: Israel, Americas, Europe and Asia Pacific. In the year ended December 31, 2022, we generated revenues of $271.5 million, representing a decrease of 15.7% as compared with the prior fiscal year. In the year ended December 31, 2022, we generated 51% of our revenues from the United States region, 34% from the Europe, Middle East and Asia (“EMEA”) region, 9% from the Asia Pacific region, and 6% from all other regions.
We are subject to the provisions of the Israeli Companies Law, 5759-1999. Our principal executive offices are located at 12 Ha’Amal Street, Rosh Ha’Ayin 4809246, Israel, and our telephone number is +972-3-908-5800. Our website address is www.kornit.com (the information contained therein or linked thereto shall not be considered incorporated by reference in this annual report). Our agent for service of process in the United States is Kornit Digital North America Inc., located at 480 South Dean Street Englewood, NJ 07631, and its telephone number is (262) 518-0200. As a company whose ordinary shares are registered under the Exchange Act, we report publicly to the SEC. The SEC maintains an Internet site (http:// www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Principal Capital Expenditures
Capital expenditures in the years ended December 31, 2020, 2021, and 2022 were approximately $13.5 million, $14.5 million, and $18.0 million, respectively, and were principally used for the purchase of property, plant and equipment. The aggregate amount for 2020, 2021, and 2022 included approximately $2.5 million paid for the land for our new 6,400 square meter ink manufacturing and storage facility in Kiryat Gat, Israel, which we opened on January 26, 2022. The total cost for land, construction of the facility, design and installation of the production line, was approximately NIS 69 million (approximately $22 million). We used cash on hand to finance the construction of that facility. Our capital expenditures for the acquisition of interests in other companies within the last three years and through the current time are described below.
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On August 11, 2020, we completed the acquisition of Custom Gateway, an innovative technology provider of cloud-based software workflow solutions for on-demand production business models. Its platform supplements Kornit’s Konnect platform for visibility and control of print operations and offers Kornit customers valuable business insights for agility in the face of market dynamics and disruption. The total cash consideration paid for this acquisition was $16.9 million.
On August 10, 2021, we completed the acquisition of certain assets of Voxel8, primarily related to its advanced additive manufacturing technology for textiles, which allows for the digital fabrication of functional features with zonal control of material properties, and for utilizing high-performance elastomers adhering to inkjet technology. The total cash consideration for this acquisition was $15.0 million.
On April 5, 2022, we completed the acquisition of Lichtenau, Germany-based Tesoma GmbH, or Tesoma. Tesoma is globally recognized for the high-quality engineering and performance of its cutting-edge textile curing solutions. The total cash consideration for this acquisition was 14.0 million Euros.
| B. | Business Overview |
Industry Overview
The General Textile Industry
Textile is a flexible material formed using various processes, including weaving, knitting, crocheting, or felting. This material may be used for manufacturing a broad range of conventional, as well as advanced, finished goods, which may be broadly categorized (as related to the focus of our business) into fashion, apparel, and home decoration. According to a report published by Statista in October 2022, the value of the global apparel retail market was approximately $1.4 trillion in 2020 and was forecasted to grow from an estimated $1.53 trillion in 2022 to $1.94 trillion in 2027, reflecting a compound annual growth rate (CAGR) of approximately 5.0% from 2022 to 2027. Increasing income per capita, favorable demographics and changing consumers’ shopping habits are expected to drive long-term demand in the apparel market.
The global printed textile industry involves printing on fabric rolls, finished garments and unsewn pieces of cut fabric at various stages along the value chain in the production of goods for (as related to the focus of our business) fashion, apparel, and home decoration. According to The Future of Digital Textile Printing report published by Pira in September 2021, it is estimated that approximately 94% of the global output of printed textile in 2021 was carried out via analog methods of printing. According to the same Pira report, the global value of digital printed textile output was estimated to be approximately $4.4 billion in 2022 and expected to grow to approximately $7.0 billion by 2026, reflecting a CAGR of 12.3% in the four-year period from 2022 to 2026, mainly driven by changes in consumer demand, sustainability and brand needs to mitigate excess inventory. According to the same Pira report, digital textile output volume is expected to grow at a CAGR of 13.4% for the four-year period from 2022 to 2026.
Inflation, Geopolitical Instability and Continued Supply Chain Disruptions Impact on the Textile Industry
Global supply chains and most economies have been impacted by disruptions from the COVID-19 pandemic and from macro-related headwinds, such as increased inflation, rising interest rates, and uncertainties in consumer sentiment, all of which are contributing to cautious discretionary spending. In addition, heightened geopolitical tensions, including from the ongoing war in Ukraine, trade wars, as well as sanctions, continue to set an uncertain and unstable backdrop, intensifying operational disruptions across global supply chains and economies.
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Consumer demand for extremely fast delivery, both online and in-store, combined with the demand for sustainable materials and manufacturing processes continue to significantly pressure companies’ operations. Over the past several years, the broader apparel and textile industry supply chain has proven to be broken due to reliance on antiquated production methods, which are highly polluting, wasteful, labor-intensive, and widely disbursed geographically. Given the implications of the apparel and textile industry’s extensive supply chain, many fashion executives are working hard to find solutions, such as in-house distribution, moving production closer to the consumer via nearshoring and onshoring, cutting-edge inventory management, and securing access to raw materials. Fashion companies are also working closely with their manufacturers to navigate continued supply chain disruptions.
According to McKinsey’s “State of Fashion 2023” survey, approximately 60% of fashion executives are considering forming strategic partnerships with their suppliers to increase their speed to market and create more efficient supply chains that will carry benefits for their businesses over the long term.
We see increasing interest from fashion brands, retailers, and digital platforms to move from offshore mass production to near shore and onshore on-demand production models, with the industry gradually transitioning from analog to sustainable, on-demand digital production solutions. We believe moving production closer to consumers and using sustainable, on-demand digital production technologies could transform the apparel and textile industry’s supply chain to a more agile, efficient, profitable, and sustainable business model over time.
Mega Trends Affecting Our Industry
Industry 4.0
Digitization of manufacturing is transforming the way products are being produced. This transformation process is also broadly referred to as Industry 4.0, representing the fourth industrial revolution occurring in manufacturing. This fourth industrial revolution is primarily about full digitization and the move away from analog production methods, as well as cloud network connectivity, and the introduction of autonomous systems fueled by data and machine learning. Future factories are predicted to become more efficient, productive, and less wasteful primarily due to the support of machines that get smarter with access to more data, increased use of affordable robotics in production environments, and data-connected logistics supply chains. We believe a similar digital transformation could occur in the textiles industry to yield what could be referred to as Textile 4.0, as the fashion and apparel industry segments in which we serve have been operating in traditional, analog, and labor-intensive models for decades. This market landscape minimizes the efficacy of forecasting demand, fashion cycles, and reliance on complex, widely dispersed and broken supply chains that slow fulfillment to weeks, months, and beyond. We believe that in this new construct, consumer demand is becoming more immediate and, in many cases, on a moment’s notice given fast-moving trends in the market. As such, some consumers are gravitating towards brands, retailers, and fulfillers that can satisfy those demands in a similarly quick manner. On the supplier side, the benefits include “stocking” virtual stores rather than carrying physical inventory, which creates an enormous opportunity to eliminate large quantities of items that are often at risk of being unsold. The supplier therefore produces only when the virtual product is chosen and purchased by the consumer. We believe sustainable, digital, on-demand production capabilities are more agile than current analog production methodologies and will become essential in meeting higher consumer demand.
E-Commerce Boom
E-commerce has grown globally at an unprecedented rate and is transforming retailing across industries. Around the world, e-commerce is entirely changing the way people shop, with access to global shopping opportunities providing consumers with greater choice and allowing them to save time and money.
In the last decade, the e-commerce market has evolved from the simple concept of connecting a brick-and-mortar retail merchant with consumers via an online storefront, to providing merchants and consumers with a frictionless global shopping ecosystem powering multiple store concepts that is available 24/7 and across multiple devices. E-commerce giants and technology vendors continue to invest in advanced technologies such as virtual reality, 3D modeling, augmented reality, and artificial intelligence in a continuous effort to improve the online shopping experience for consumers.
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Statista projects the CAGR for retail e-commerce sales worldwide between 2022 to 2027 will be 11.8%, reaching $6.12 billion in 2027. According to Statista, during 2021, the percentage of consumers who made at least one purchase online in the previous 12 months grew to 74% of population in the U.S., 81% in the UK, and 69% in China.
In recent years, the creators’ economy has been gaining momentum and rapidly growing to an estimated market size of $104 billion as of May 2021, according to Influencer Marketing Hub. The creator economy is the collection, creation, distribution, and monetization of content in the digital world. At the core of the creator economy are social media channels and ecommerce platforms allowing creators to productize and monetize their content and traffic. Following the e-commerce boom and its evolving connectivity with social media platforms, creators-focused e-commerce channels have emerged to offer services like influencer marketplaces, merchandise stores, and tipping platforms to help content creators leverage the traffic they create and the connection with their audience. Easier monetization tools and increasing opportunities are fueling the growth of the creators’ community, in which players can benefit from income generated from their online content. According to a Creator Earnings 2022 survey, 48.72% of creators surveyed stated content creation is a full-time profession for them given the income generation potential.
According to Digital Commerce 360, e-commerce apparel sales reached $159 billion in 2021, a 16% year-over-year increase from $138 billion in 2020. Due to post pandemic effects, offline U.S. apparel sales grew rapidly by 53% year-over-year in 2021, while online U.S. apparel sales grow year over year by 16%.
Clearly, COVID-19 accelerated e-commerce trends as we witnessed an unprecedented growth during 2020. For example, according to McKinsey, e-commerce penetration in the United States doubled the prior 10 years’ penetration, from approximately 15% to more than 30%. According to a recent report by Forrester, the pace of e-commerce growth is in part reverting to pre-pandemic growth rates, with e-commerce expected to grow at a compound annual rate of approximately 10% in the US and 11% in Europe, between 2022 and 2025. As such, this pace is more in line with the pre-pandemic growth rates of approximately 14% between 2016 and 2019, compared with approximately 30% growth between 2019 and 2020.
Recently, a movement towards the third iteration of the internet has gained significant momentum. Each of the two past iterations of the internet were created to solve existing challenges associated with the previous or outdated versions. The latest iteration, Web 3.0, focuses on a more decentralized and open internet where users and creators have equal input and are able to share value more efficiently. Web 3.0’s impact on e-commerce focuses upon fair value distribution and building an open economy for creators, consumers, and manufacturers. The core pillars of e-commerce in the era of Web 3.0 support an open economy which thrives on trust, transparency, and borderless exchange, eventually creating an environment where buyers and sellers can better and more efficiently interface with one another. Web 3.0 drives ecommerce players to rethink business models and build new ones centered around content management, partnerships, licenses and subscription, memberships, advertisements and overall user experience. New technologies, including Virtual Reality (VR) and Augmented Reality (AR), used in the metaverse and in the physical world, are creating new shopping experiences for consumers and are helping drive an increase in consumer spending. According to research performed by Technavio, the global AR and VR market is expected to increase by $365 billion from 2022 to 2027, representing an approximate 53% CAGR during that period. The actual growth of the market will depend on several factors, including new product launches and the increasing demand and acceptance of VR and AR technologies.
Traditional Retail Meltdown
Over the past decade, multiple factors resulted in the reduction of the number of North American retailers, several of whom have gone through bankruptcy or organizational restructurings. Announced plans from major retailers to either discontinue or greatly scale back their retail presence peaked during 2020 when worldwide lockdowns significantly limited consumers ability to shop in-person, a trend that continued in 2021. For example, Lord & Taylor (established 1826) filed for bankruptcy in August 2020, and announced it was closing all stores a month later. A year later, the Lord & Taylor brand emerged under new ownership as a digital collective store. Other major retailers declaring bankruptcy in 2020 and 2021 included: ABC Carpet & Home, Lorna Jane, Sequential Brands Group, Global Brands Group USA, Alex and Ani, The Collected Group, Christopher & Banks, Loves Furniture, Brooks Brothers, J.C. Penney, Neiman Marcus, J. Crew Group, Stein Mart, and Tailored Brands (which owns Men’s Wearhouse and Jos. A. Bank).
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Traditional retail stores continue to close primarily due to the impacts of shifting consumer habits towards online shopping, a less than inspiring shopping experience at traditional brick-and-mortar stores, as well as retailers’ inability to sell “trend-right” apparel, which in many cases results in the increase of unsold inventory and yields significant markdowns and pressures profitability. Inditex (the operator of several brands, including Zara) stated that it would close up to 1,200 stores worldwide in 2021 to focus on digital growth; Gap and Banana Republic stated that they will close 350 of their stores in North America during 2023; and Diane von Furstenberg stated that all of its stores will close and that the business will evolve to a digital-only model, leading to the reduction of its staff by up to 75%.
Traditional retailers continue to struggle with finding the right balance between supply and demand (e.g., producing merchandise to keep their best-selling products in stock, while limiting excess inventory and waste). Rising inventories often lead merchants to offer consumers steeper discounts to increase the turnover of unsold inventories and make room for next season’s products. Further, recent e-commerce share gains put additional pressure on traditional retail stores who in many cases find it difficult to compete with the level of selection, price, service, and convenience provided by many of the pure-play e-commerce companies or scaled omni-channel retailers.
While the pandemic accelerated the fall of several retailers due to lower sales volumes, increasing debt, and changes in consumer preferences, according to Coresight Research, during 2022 U.S. retailers announced 4,432 store openings, and 1,954 store closings, resulting in net store openings of 2,478.
COVID-19 accelerated previously existing trends with companies that had embraced digital transformation, Industry 4.0 production methods, and faster delivery, experienced growth, while those relying on more traditional, analog production and delivery methods, lagged. We believe this emphasizes the need for digital transformation, as enterprises with business models that are more reliant on physical storefronts and broken multinational supply chains are more susceptible to fallout from major economic disruptions, as witnessed in 2020, 2021, and 2022.
Social Media Platforms
Social platforms, historically categorized into media and networks (which categories have merged in recent years), have changed the industrial and business landscape, both for companies that have adopted them and for those that have not. Social media platforms have a powerful impact on the ways in which individuals and organizations communicate with each other and on consumer trends, demand, and brand perception. The number of social media users, according to DataReportal’s Digital 2023: Global Overview Report from January 2023, was 4.76 billion, representing 59% of the total world population. According to Statista, in the U.S. alone, over 302 million social media users represented roughly 91% of the U.S. population in 2022. This mainstream effect has a dramatic impact on the ability of small and micro brands, some of which are established by individuals or organizations that are leveraging their social influence status to inspire individuals who, in turn, purchase those brands’ products, to achieve ultra-fast recognition and exponential growth at the expense of traditional players, who we believe will need to be more agile and responsive in order to connect with a growing consumer base.
Recently, the metaverse concept has gained a lot of attention and is regarded by many as the evolution of the traditional social media model. Simply described, a metaverse is a hybrid world between physical and digital spaces, where virtual reality, augmented reality, and artificial intelligence work together to offer users a more immersive online experience, providing a more tangible sense of presence and further differentiating it from traditional social media platforms. The metaverse concept is growing in popularity, with 72% of U.S. consumers report that they have accessed virtual worlds in the last 12 months, according to The Business of Fashion report “The Opportunity in Digital Fashion and Avatars”.
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As the metaverse concept continues to develop, the future of e-commerce and social media platforms could change dramatically. The fashion industry is also evolving rapidly to fit these new digital spaces and implications:
| ● | Digital environments have become increasingly immersive and portable, enabling fashion companies to convey their brand story in new ways, while evolving their acquisition and retention strategies. |
| ● | Digital fashion assets will become widespread and more desirable, as consumers spend greater amounts of time in digital worlds, according to The Business of Fashion Report “The Opportunity in Digital Fashion and Avatars” |
| ● | Brands have an increasing opportunity to monetize digital assets and manage their scarcity. |
| ● | Virtual worlds enable participants to curate multiple identities, and brands can shape how these identities are communicated. |
Another important evolution of traditional social media is strongly tied to the increasing popularity of gaming, with the video games market already valued at approximately $180 billion to $200 billion according to The Business of Fashion. Game developers and social media platforms quickly discovered that players enjoy the personal satisfaction that comes with posting their high scores and game achievements. Once they identified the mutual value, the two platforms started helping one another and adapted synchronously. Many communities were developed around different games and worlds within gaming environments, enabling a new platform for global communication.
In recent years, gaming companies saw the potential that multiplayer games had to become an even more interactive platform than social media. Today, many online games function as social platforms for people to interact with their friends. Games like Fortnite, Minecraft and Roblox are examples of how online games can create entire gaming communities and build robust social media networks. Online video games are evolving to become an alternative to traditional social media platforms, and as a meaningful interactive internet marketplace.
Sustainability
The need to reduce or contain the ecological footprint of the textile and apparel industry is affecting the entire industrial system. The urgency for change has flowed through from political and environmental activists and scientists, into mainstream government regulators, and business leadership across the globe. A sustainable industrial system requires the formulation of new strategies and thinking, integrated into business and operational frameworks around sustainable manufacturing, supply chain design, sustainability performance measurement and ongoing management. While industrial production is considered part of the problem, it is now also considered as part of the solution. From a practical point of view, companies are focusing their sustainability strategies to include technological improvements that enable cleaner production, pollution prevention, and other sustainable manufacturing practices.
Among the biggest environmental impacts of the textile industry are water pollution and waste of both water and garments.
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In some countries where garments are produced, untreated toxic wastewater from textile factories is discharged directly into rivers and other water sources. This is extremely harmful to aquatic life and the health of millions of people living near to those riverbanks and water sources. In many cases, the contamination reaches the sea and eventually spreads around the globe. Approximately, 200,000 tons of dyes are lost to effluents every year according to an article published by Sustain Your Style. According to the World Economic Forum, the textile industry is also the second largest consumer of water. According to Sustain Your Style data, each ton of dyed fabric could require up to 200 tons of freshwater.
Consumer behavior and frequently changing fashion trends are making it difficult for fashion brands to accurately predict the volume of items that will be purchased, causing, among other things, approximately 30% of garments to be overproduced, according to the Australian Circular Textile Association (ACTA).
Overproduction helps drive massive inventory leftovers and negative pressures on financial performance due to the reliance on cost-per-unit production methodologies driven by traditional supply chains, which are designed for mass production volumes, and to significant mark-downs on those excess goods in inventory. According to the “Fashion in Focus” report of Sourcing Journal over stocked inventory that has not been sold results in increased discounting, margin pressure, and the cancellation of goods that customers want. Off-price and outlet retailers, both online and in-store, opportunistically purchase these overstock goods and create increased competition for already discounted wares. Redundant inventory and the lack of adequate recycling infrastructure causes textile waste to rise and become an industry wide problem.
The textile industry is one of the largest industries in the world. The sustainability of the textile industry is critically important, as are the differences companies can make environmentally, economically, and socially. A few of the key reasons that the textile industry should emphasize sustainability include reducing costs, protecting the environment, and creating goodwill from consumers for eco-friendly practices in a company’s supply chain. As one of the world’s most polluting industries, sustainability issues in the textile/apparel industry continue to receive great attention. According to a Preferred Fiber & Materials Market Report in 2021, less than 10% of the global textile market is composed of recycled materials.
Further, incoming regulatory constraints, including the New York State Bill, the Fashion, Sustainability and Social Accountability Act ‘the Fashion Act’, are now applicable to fashion companies selling products in New York and generating more than $100 million in revenues. According to this regulation fashion companies would have to map at least half of their supply chains and disclose environmental impacts including greenhouse gas emissions, water footprint, and chemicals used in production. Increasing regulatory trends around the globe are helping with the necessary shift to a more sustainable textile industry.
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We strive to take a leading role in efforts towards, and be responsive to, societal calls for sustainability. In order to do so, we respond to the sustainability demands of consumers and regulators, which has the following advantages:
| ○ | It ensures resilience to sudden market shifts from unforeseen disruptions (e.g., recent pandemic and associated supply chain disruptions); and |
| ○ | It responds to consumers’ immediate gratification needs. |
In our quest for continued sustainability leadership, we are committed to both “Enable the Change” and “Be the Change” as our mottos for sustainability, which we believe will help to reduce the social and environmental impacts of the fashion industry. This sustainability strategy is holistic and incorporates numerous factors to best meet our goals, including stakeholders’ input and needs, our distinct business model and strategic goals, and the industry and overall ecosystem. We have set various sustainability goals related to both Planet and People that we hope will enable us to both “Enable the Change” and “Be the Change”, as follows:
Enable the Change:
Planet:
| ● | Preventing Overproduction: By 2030, innovate and build a richer suite of products and tools that facilitate further expansion of on-demand production. |
| ● | Water Conservation: By 2025, establish an evaluation index to enable our clients to track and monitor their water conservation impact derived from our tech. |
| ● | Sustainable Sourcing: By 2027, perform ESG audits of 20% of our material suppliers. |
People:
| ● | Product Safety: By 2030, 70% of all our customers will undergo safety training, via a designated digital portal. |
| ● | Ethical Marketing: By 2030, develop and implement a “Kornit Index” for inclusiveness in all partnerships with fashion designers. |
Be the Change:
Planet:
| ● | Climate Action and Energy Efficiency: By 2030, reduce our GHG emission intensity (for Scope 1+2) by 75%. |
| ● | Green chemistry: By 2030, reduce 50% of VOC (Volatile Organic Compounds) emissions through our customer production processes. |
| ● | Energy Efficiency: By 2030, achieve energy-efficient certification for all our facilities. |
| ● | Waste Management. By 2030, divert 90% of non-hazardous waste related to our manufacturing processes from reaching landfills. |
People:
| ● | Diversity, Equity & Inclusion (DEI): By 2025, achieve full gender pay parity and by 2030, achieve a workforce of 40% women with women composing 40% of managerial roles. |
| ● | Growth and Development: By 2030, provide every employee with at least 30 hours annually of professional training (excluding compliance and safety training). |
| ● | Employee Health and Safety: By 2025, implement a requirement for all employees in technical positions to complete at minimum six hours annually of safety training and obtain ISO 45001 for our facilities. |
| ● | Work Environment and Terms of Employment: By 2030, achieve an eNPS (Employer Net Promoter Score) of 80%. |
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Mega Consumer Trends Affecting our Industry
Personal Expression
We believe modern consumers are increasingly seeking the ability to express their identities and beliefs through everyday choices. In the past, a consumer’s choice of brand affiliation was primarily about aligning the self-image with the brand that was considered “appropriate”. Consumers are now seeking new and creative ways to express their identities through unique, customized or personalized impressions, styles, and messages created through their own “private brands” or via affiliation with unique designed goods from “no brand”. According to McKinsey, companies that grow faster drive 40% more of their revenue from personalization than their slower growth counterparts.
In the wake of COVID-19, expressive casual wear also became a growing trend with consumers spending more time working from home or in a hybrid environment.
Instant Gratification
The explosive growth and adoption of technology and mobile applications usage has catalyzed the modern consumer to seek solutions that are faster and easier than ever before. This shift has given way to an on-demand economy where immediate gratification has become standardized across industries. Examples include the instant arrival of rides in the transportation industry, unlimited on-demand video streaming, minimal wait time for food deliveries, or in the case of retail, instant visibility and availability of product and inventory, and ultra-fast delivery. Consumers expect to be serviced almost instantaneously and reward the brands that understand and meet their instant gratification needs. According to “The Future of Commerce Trend Report 2022” by Shopify, one of the most important qualities that online shoppers value is the estimated time of delivery, with 68% of online shoppers influenced by the estimated time of delivery, as they expect either same-, next-, or two-day delivery. According to Statista, the same-day shipping market in the U.S. is forecasted to exceed $10.6 billion in 2022, representing growth of approximately 80% since 2019, and is expected to reach over $15.6 billion in 2024.
Another important factor for consumers is free shipping. According to Inc, 88% of consumers are more willing to purchase from e-commerce stores that offer free shipping, while 87% of consumers are willing to shop at online stores that also offer free shipping for returns.
Given the changes in consumer behavior, retailers are evaluating ways to transform their supply chain, with a high focus on adopting on-demand production, improved inventory management and an efficient and scalable fulfilment infrastructure. In addition to retooling their internal fulfilment capabilities, many retail brands have begun to leverage the capacity of third-party online stores to meet consumer demand for delivery speed and product availability.
Social Media Influence
Fueled by widespread mobile device accessibility and the rise of mega social media platforms like YouTube, Instagram, and TikTok, influencer marketing continues to significantly impact social media and narrow the bridge between discovery, inspiration, and purchase. As of the end of 2022, 92% of internet users worldwide have a social media account, based on data from Statista. According to a Shopify survey from September 2022, 75% of global business decision makers believe interacting with customers in the metaverse will become commonplace.
According to Morning Consult’s “The Influencer Report” published in 2019, which surveyed over 2,000 13-38-year-olds in the US, when asked what traits they consider deciding which influencers to follow, 88% of respondents were looking for influencers who are authentic and genuinely care about their interests. We believe this can explain why sustainable bloggers and green living influencers are an increasingly popular subgroup. Many fashion influencers across the globe are using their platforms to promote ethical fashion brands, spread eco-conscious messages and encourage users to create a positive impact on the planet.
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“Be Greener”
In recent years, news articles and documentaries about rising sea levels, declining air quality, and shrinking animal populations have become more common. Sales of reusable coffee cups and water bottles have increased, plastic straws were banned in many bars and restaurants around the world, and mega consumer brands, like Evian and Coca-Cola, have committed to using recycled materials in their production processes. The impulse to “be greener” is clearly gaining momentum. Millennials are driving a sustainable movement with their lifestyle and behavioral changes. A recent McKinsey survey of Americans between the ages of 18 and 24 said they are willing to pay a premium of nearly 15% for clothes made with recycled materials. According to Global Web Index’s Connecting the Dots report from 2021 around 40% of digital consumers surveyed said environmental concerns impact them the most when deciding to buy from a brand. According to McKinsey’s “State of Fashion 2023” survey, 54% of consumers anticipate buying more recycled clothes and 92% would take part in a brand-sponsored recycling program. Furthermore, about half of European purchasing officers expect more than 30% of their products to contain recycled fibers by 2025. Often coined the “green generation,” many brands are starting to see the appeal of and the opportunity to connect with their consumers through these changes, rather than viewing the changes as a regulatory burden.
This trend affects investments as well, as textile recycling technology has been an area of interest for investors. For example, in 2022 mechanical cotton recycler Recover raised $100 million of capital to fund the next stage of its expansion. Another example is Worn Again, which raised $32 million from strategic investors, including H&M, in October 2022 to help fund a new textile-recycling demonstration plant in Switzerland, bringing the start-up’s total fundraising to $46 million.
A quarter of respondents to a 2021 McKinsey survey in the UK said their purchase decisions were driven by sustainability, while 80% of consumers in a U.S. survey said sustainability was an important factor when selecting a fashion brand to shop from.
Governments and brands are joining efforts to promote industry regulation that supports eco-friendly global trends, including the imperatives of circularity, reducing overconsumption, ensuring transparency and traceability. Another important objective is to nearshore or re-shore operations, which could eliminate the pollution associated with transnational supply chains and transport, reduce production and delivery times, and minimize supply chain vulnerabilities against disruptions, making the supply chain more resilient.
Implications on Fashion and Apparel Transformation, as it Relates to our Business
Regardless of size and specific segment, industry players in fashion and apparel, whether traditional brands, digital start-ups, new generation e-tailers, or different forms of customized designers, now need to be nimble, sustainable, think digital-first and achieve ever-faster speed to market. They need to connect to the end consumer for self-expression, take an active stance on social issues, satisfy consumer demands for ultra-transparency and sustainability, and ensure they invest in an omni-channel strategy, thereby enhancing their manufacturing productivity, supply chain resilience, lean inventory management, and their ability to respond to the immediate gratification needs of the evolving consumer. Traditional brands are beginning to self-disrupt their own business models, adjusting their image and offerings in response to the new breed of emerging high growth digital native brands that are accelerating, thanks to changing consumer preferences, growing appetite for self-expression, and instant gratification. We expect more traditional brands to follow suit on this omni-channel path of self-disruption, which will have a significant impact on their ability to connect with consumers and meet their needs.
We believe the following objectives capture some of the key areas of focus related to our business, as traditional and new generation online-first fashion and apparel players continue to adapt their value propositions and operating models to the rapidly changing environment and consumer preferences. We believe these industry areas of focus will continue to fuel the growing need and demand for our innovative solutions:
| ○ | Connect with consumers’ need for self-expression via unique graphical and text designs |
| ○ | Capture the moment, by shortening the time from inspiration and design, to a sellable product |
| ○ | Connect virtual fashion with the physical world - from virtual design to a ready-to-wear garment; from a physical piece to a virtual representation |
| ○ | Refine product assortments to focus on profitability and value |
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| ○ | Connect with consumers via offerings that are personalized and customized |
| ○ | Implement a smart and lean inventory management strategies without compromising on design variety |
| ○ | Develop in-season reactivity to respond to unexpected demand for specific product offerings |
Impact on the Industry Need and Demand for Operational Transformation
New generation start-up apparel and fashion businesses born and grown in digital retail and production, some of which are existing customers of our solutions, have already implemented successful full or partial on-demand production models with the establishment of their greenfield environments. We expect these businesses to continue scaling and perfecting their existing digital business and operating models, including investing in front-end technologies to continue improving the online customer experience and in further scaling their on-demand production capabilities.
We believe that in order to address the focus areas identified above, traditional industry and brands will continue to examine and digitally transform their predominantly mass production and inefficient analog operating production models and supply chains, especially as it comes to managing their finished goods inventory levels, which remains a meaningful financial risk. Traditional companies have continued to invest “upstream the chain” in better predicting buying trends, consumer preferences, and demand via sophisticated big-data analytics, as they plan their collections and inventory levels. However, consumer demand is becoming more volatile and difficult to predict. According to McKinsey’s 2023 “State of Fashion” report, macroeconomic pressures and the war in Ukraine continue to weigh on fashion’s global supply chains. According to the same report more than half of fashion executives believe supply chain disruptions will be one of the top factors impacting global economic growth in 2023, further demonstrating the challenges with prediction-only production planning and the need to shift to a more agile, partial or full on-demand production model. As a result, 65% of fashion executives are considering nearshoring or reshoring, creating new manufacturing hubs dedicated to serving US and European demand. We believe that industry players will continue to seek ways to adopt major changes to their business and operating models, supply chains, and, specifically as it relates to our business in how they design, produce and decorate garments and apparel. This movement can be demonstrated by the fact that 60% of fashion executives are considering forming strategic manufacturing partnerships with their suppliers.
We believe traditional fashion and apparel manufacturers are looking to close a number of key production gaps, which are described below, as they plan their future marketing and production strategies.
Mass Customization and Personalization: The capability to manufacture a relatively high volume of product options, carrying unique designs, without tradeoffs in cost, delivery and quality. In a simplified way, the ability to cater demand to mass produce customizable products with unlimited designs, on a one-by-one basis, in a cost-efficient manner.
“Shorter Runs”: Mass production of smaller batches, most likely with higher number of order amounts, at a similar cost per garment compared with producing large batches. Producing in smaller batches offers greater flexibility, as finished goods inventory risk is reduced due to ultra-short cycles more accurately replenishing the inventory stock in response to consumer demand and buying patterns. The pressure for smaller batch sizes and on-demand replenishment is driven in part by profitability and a desire for sustainability. McKinsey’s “State of Fashion 2023” report states the following: “While manufacturers are likely to be cost-conscious in 2023, developing capabilities for nearshoring, small-batch production and digital production processes will help them establish a competitive advantage and will make them less reliant on price as a bargaining chip in building relationships with brands.”
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Proximity Production, Proximity Decoration and Nearshoring: Two decades ago, U.S. and European mass-market apparel brands and retailers shifted production to Asia to gain a cost advantage. Factors are changing this calculus by making it critical for companies to bring new styles to market more quickly and switch out lines mid-season. By moving manufacturing closer to consumer markets, brands can increase their speed to market, reduce transportation costs and duties, and mitigate various risks, including those related to inventories. In the McKinsey “State of Fashion 2023” Survey, 65% of fashion executives said they were considering nearshoring to address supply chain challenges. Moreover, in McKinsey’s 2021 Apparel Chief Purchasing Officers Survey, approximately 75% in North America said they expect to increase the share of sourcing from Central America, with more than 35% expecting to increase the share from Mexico. In Europe, Turkey is emerging as the preferred closer-to-home hub, with 85% of Western European respondents expecting to increase their supply from Turkey, followed by Eastern Europe and Northern Africa. By reducing time-to-market, companies can produce, partially produce, finish, print or decorate more closely in-line with demand, reducing overstocks and increasing full-price sell-through. Sourcing closer-to-home locations could create environmental benefits, too, for instance by reducing greenhouse gas emissions and energy use, as well as unlocking access to more sustainable materials and improving water stewardship. According to McKinsey’s 2020 Fashion on Climate report, approximately 70% of the industry’s greenhouse gas emissions was generated from upstream activities. Some manufacturers are therefore aiming to decarbonize production and leverage their improved sustainability credentials to further differentiate themselves from the competition.
Microfactories, Speedfactories, Reshoring: These are smaller and nimble manufacturing sites, usually planned out in an urban cell model, that can efficiently source or produce raw materials as well as produce and ship finished apparel goods end-to-end. The success of these factories heavily relies on being efficient with real estate and fully digital, with either a semi or fully automated manufacturing workflow, offsetting the inefficient cost structure often associated with large analog equipment and rising real estate and labor costs, predominantly in developed countries.
We believe the technology and digital textile printing solutions that we bring to the market, as listed in our products and technology sections, are key enablers for these business and operating models. We expect increasing demand and adoption of our solutions by start-ups and new-generation digital apparel brands, some of which are our customers, as well as from traditional apparel brands that need to transform their operating models to remain connected with their consumers.
Overview of Textile Printing Processes
The graphic and accompanying description below present various textile printing processes:
Screen printing is the most commonly used printing process for textiles. The two primary methods of screen printing are rotary screen printing and automated carousel screen printing.
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The following chart summarizes the key steps involved in the analog printing process:
Rotary Screen Printing Rotary screen printing is commonly used to print on outerwear, underwear, sportswear, upholstery, and linens. It involves multiple, time-consuming process steps. Rolls of fabric pass through rotating cylinders that are engraved with the image or design to be printed. Each cylinder then applies ink of a different color, which forms part of the image or design. This process is generally used to print a pattern on a fabric roll that is then cut and sewn into finished products. Rotary screen engraving is a costly process that takes between four and five hours per cylinder and is frequently done offsite. Preparation of colors typically takes an additional 30 minutes and the setup of the printer itself typically takes nearly 1.5 hours. The process can require up to seven people. The maximum size of an image or design is limited based on the circumference of the cylinders, which is typically no more than 60 centimeters.
The following diagram depicts the analog rotary screen printing process:
Automated Carousel Screen Printing. Automated carousel screen printing is commonly used to print on finished garments and cut pieces. In automated carousel screen printing, a blade or squeegee squeezes printing paste or ink through mesh stencils onto fabric. The process typically employs a series of printing stations arranged in a carousel. At each station, one color of ink is pressed through specially prepared mesh stencils, or screens, on to the textile surface. Between color stations, there are also flash drying stations and cool-down stations to ensure that deposited ink does not inadvertently mix with the next color to be applied. Preparation of the mesh stencils is a specialized process, and its complexity is a function of the number of discrete color separations and screens that need to be prepared for a given design. The process of color separations, film production, and screen exposure and alignment typically takes approximately 1.5 hours for six colors. Once the screens and color separations are complete, preparation of the carousel typically takes between 40 and 60 minutes. After being manually loaded, the textile moves along the carousel from station to station where each color is applied separately. Unlike rotary screen printing, carousel screen printing does not require fixing the image or design with steam or hot air and, in most cases, does not require washing and drying the textile afterward.
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Digital Printing Processes
Digital textile printing uses specially engineered inkjet heads, rather than screens and cylinders or mesh stencils, to print images and designs directly onto fabrics. As such, the use of digital technology eliminates multiple complicated, costly, and time-consuming steps, such as screen preparation or cylinder engraving, preparation of pastes or inks, and screen or cylinder alignment.
Most fabrics need to be pre-treated before printing by submerging them in a solution that is designed specifically for the type of fabric and ink being used. This coating process is essential for achieving the desired chemical reaction between the ink and the fabric. The fabric is dried following pre-treatment. After the ink drops are applied, the printed fabric undergoes a process of fixation that is also specific to the type of fabric and ink being used. Digital textile printing generally uses either dye-based or pigment-based ink.
The digital textile printing market principally includes two types of printing processes:
Direct-to-Garment (DTG) In DTG printing, an inkjet printer prints directly on the textile. DTG printing allows for printing images and designs onto finished textiles, such as t-shirts that have already been sewn and dyed. The following chart summarizes the key steps involved in the DTG printing process:
Direct-to-Fabric (DTF) In DTF printing, rolls of fabric pass in-line through wide-format inkjet printers that are utilized to directly print images and designs onto rolling fabric. The following chart summarizes the key steps involved in the DTF printing process:
Recent technological developments in digital printing have supported the adoption of digital printing by the global printed textile industry, including by custom decorators, online businesses, brand owners and contract printers. As a result of consumer and macro trends, which were accelerated due to the COVID-19 pandemic, we believe that these businesses offer a significant and rapidly growing market for digital printing solutions.
How Digital Textile Printing Addresses the Industry Needs
The following characteristics of digital textile printing enable new business and operating models, help industry players as they address their manufacturing gaps, and, as these characteristics relate to our business, are driving the shift from analog to digital textile printing:
Manufacturing flexibility: Digital textile printing allows a full image or design to be printed on a garment or cut fabric in one manufacturing step, compared with multiple steps in an analog printing process. Digital textile printing gives manufacturers the ability to print short runs, with personalization capabilities, in a cost-effective manner with a minimum order quantity of one unit. Unlike screen printing, digital printing costs remain the same when printing a single unit or multiple units. This allows printers to execute orders one by one without needing to accumulate large demand for a design before printing. In a post- COVID-19 world, manufacturing flexibility will play an essential role in building brands’ resilience. Companies must rethink their sourcing strategies while implementing cutting-edge supply chain management, and building in greater flexibility, in order to keep products at pace with customer demand.
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Design flexibility: Digital textile printing enables a larger variety of artwork to be imprinted, without limitations on number of colors per design and high-resolution imaging.
Integration with advanced workflow environments: Digital textile printing is better suited for the transition of the production floor environment to full digitization, including connectivity to cloud networking elements and productivity analytics software solutions.
Reduced time between design and production: The digital textile printing process allows for samples to be quickly produced, evaluated, and modified, which permits brand owners to increase the frequency and variety of replenishment cycles in response to fashion trends.
Decreased risk of excess inventory: The costly and time-consuming upfront setup required in analog production methods is avoided when using digital printing technologies. Therefore, digital printing enables the cost-efficient production of a smaller quantity of garments, which mitigates excess inventory risk and improves profitability. Stocking blank garments or fabric and decorating them only when demand is identified significantly reduces the amount of inventory at risk. This reduces working capital requirements, thereby enabling the emergence of numerous online businesses focused on the sale of printed textiles.
Reduced labor and physical space requirements: Digital textile printing requires significantly less labor to print an equivalent output due to the significant reduction in process steps. Kornit’s unique proprietary process for digital textile printing further reduces the need for labor and introduces additional floor space savings for manufacturing equipment by eliminating certain process steps and consolidating multiple process steps into a single printing system. The combination of labor savings and a smaller floor footprint, coupled with lower energy consumption and a lack of environmental impact, enables manufacturers to move production closer to consumers in a cost-effective manner. The textile business is very seasonal and the need to retain employees bears a heavy financial burden. The move to digital printing significantly reduces the need for manpower and allows for a more flexible cost structure.
Sustainability: Digital textile printing significantly reduces industrial water consumption and discharge of toxic chemicals by eliminating the need to wash screens for color changes and repeated use. We believe that this results in reduced environmental impact and in turn enables manufacturers to comply with regulatory and brand guidelines at a location of their choosing, in many cases in populated areas which are not industrial in nature.
Our Business
We develop, design and market innovative digital printing solutions for the global printed textile industry, with the aim of becoming the operating system for fashionX and textile production offering end-to-end solutions including digital printing systems, inks, consumables, and an entire global ecosystem that manages workflows and fulfillment. Our product and services offerings serve fulfillers and demand generators, such as brands, creators, and licensors, thereby connecting demand and supply, with a major focus on the fashion, apparel and home décor segments of the industry.
Our vision is to create a better world where everybody can bond, design, and express their identities, one impression at a time.
Our mission is to revolutionize the fast-changing fashionX and textile industry by facilitating and expediting the transition from analog processes that have not evolved for decades and are not fit for the rapidly changing business models and self-disruption needs of the industry, to digital methods of garment, apparel and home decor finished goods production and decoration that address the contemporary supply, demand, social and environmental needs of the industry in which we operate. We strive to connect demand generators like fashion brands, e-commerce platforms, marketplaces, designers, and licensors to the most advanced production capabilities by becoming the operating system for on-demand, sustainable fashionX and textile production. (self-expression through textiles - anyone, anywhere, anytime).
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We focus on the rapidly growing high throughput, direct-to-garment, or DTG, and Direct-to-Fabric, or DTF, segments of the printed and decorated textile industry. Our solutions include proprietary digital printing systems, ink, and other consumables, associated software and value-added services that allow for quality and cost-effective large-scale printing of short runs of complex images and designs directly on finished garments and fabrics. Our solutions address the growing production gaps reflected in the need to shift to shorter runs, proximity production, proximity decoration, partial or full on-demand production, and EcoFactory models by enabling our customers to print and decorate high quality products in a time efficient, cost-effective, and environmentally friendly manner. This allows textile manufacturers to transition from their traditional business and operating models of supply based on demand predictions, to partial or full on-demand or made-to-order models, by which decoration of fabric and production of finished goods only takes place once a customer order has been issued.
Our solutions are differentiated from other digital methods of production because they eliminate the need to pre-treat fabrics prior to printing, thereby offering our customers the ability to digitally print high quality images and designs on a variety of fabrics in a streamlined and environmentally friendly manner. When compared with analog methods of production, our solutions also significantly reduce production lead times and enable customers to produce smaller quantities of individually printed designs more efficiently and cost-effectively, thereby mitigating the risk of excess inventory, which is a significant challenge for the industry, as further described in our “Industry Overview” section above.
The success of evolving omni-channel apparel retail is dependent heavily on the ability to show a large variety of designs. Since it is more and more difficult to predict consumer preferences and demand, it is increasingly difficult to stock every possible design. Having digital capacity available allows printers, brands and retailers to offer unlimited design with minimal to no inventory risk. We believe we are well positioned to continue taking advantage of this trend.
Our DTG solutions utilize our patented wet-on-wet printing methodology that eliminates the common practice of separately coating and drying textiles prior to printing. This methodology also enables printing on a wide range of untreated natural, synthetic and man-made fabrics, including cotton, wool, polyester and lycra, and with throughputs ranging from 40 to 235 garments per hour. Our entry-level, industrial and mass production DTG solutions are suited to the needs of a variety of customers, from smaller industrial operators with limited budgets to mass producers with complex manufacturing requirements. Our patented NeoPigment ink and other consumables have been specially formulated to be compatible with our systems and overcome the quality-related challenges that pigment-based inks have traditionally faced when used in digital printing. Our software solutions simplify order to production workflows in the printing process, by offering a complete solution from web and traditional order intake through graphic job preparation and execution. We also offer customers maintenance and support services, as well as value-added services and application consulting, aimed at optimizing the number of impressions printed by our systems.
In April 2019, we supplemented our original DTG printing technology with our Kornit NeoPoly Technology, which is our industry’s first digital, industrial process for high-quality printing on polyester, thereby opening the large sport and athleisure market to our digital printing solutions. The Kornit NeoPoly Technology addresses existing challenges with a new process and ink set implemented in the Kornit NeoPigmentT process. Our process handles polyester applications without having to compromise on design, run size, substrate, or labor costs. The breakthrough technological innovation has been achieved by an innovative ink set and a physical and chemical process specifically developed for low-temperature curing, and polyester-enhancing functionalities developed to maintain fabric characteristics and provide superior fastness. This unique process overcomes dye migration on polyester. The inks are Eco-Passport certified and do not contain PVCs or any other toxic ingredients. The first system equipped with our Kornit NeoPigment Technology is the Kornit Avalanche Poly Pro, a member of our industrial platform, which became commercially available in April 2019.
In April 2021, we supplemented our original DTG printing technology with our new Kornit MAX technology, which enables never-seen-before print quality and durability standards, together with enhanced production speed. The breakthrough technological innovation has been achieved thanks to new additional process and consumables capabilities, enabling optimal control over print quality and durability on a significantly larger media variety.
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With our MAX technology we also introduced new consumables enabling another groundbreaking innovation – Kornit’s XDi technology. Kornit XDi brings a new dimension to digital printing by enabling to print multiple layers to create unlimited 3D-effects. XDi’s unique premium applications open new markets for our customers and offer boundless creative freedom powered by a simple, single-step, digital and sustainable process. Our customers are now able to do much more with their printing equipment and enter into higher margin premium markets.
In July 2022, we introduced the Atlas MAX Poly, which extends our technological capabilities in high quality printing on polyester even further by leveraging the Kornit MAX technology and incorporating it as part of our proprietary polyester printing process which is based on the Neo Olympia ink set. The Atlas MAX Poly harnesses an innovative low temperature curing ink set alongside a new process and consumables to deliver highest quality digital printing on polyester as well, as delivering improved productivity rates. These new capabilities expand our opportunity within the sports and athleisure spaces. This new platform is also equipped with Neon applications and a proprietary consumable called ProGuard, which acts as a barrier between the fabric and print and promotes the inhibition of dye migration.
In addition to offering solutions that target DTG applications, we also market an industrial digital printing solution, the Kornit Presto, which targets the on-demand DTF market. While the DTG market generally involves printing on finished garments, the DTF market is focused on printing on fabrics that are subsequently converted into finished garments, home or office décor, and other items. The Kornit Presto, like our predecessor Kornit Allegro, utilizes our proprietary wet-on-wet printing methodology and houses an integrated curing system. Following the Allegro, the Presto offers the sole single-step, eco-friendly, stand-alone industrial DTF digital textile printing solution available on the market. We primarily market the Kornit Presto to businesses seeking horizontal or vertical expansions into fabric decoration, such as innovative web-based businesses operating on-demand models that require a high degree of variety and limited order quantities, as well as to fabric converters, which source large quantities of fabric and convert untreated fabrics into finished materials to be sold to garment and home décor manufacturers, and to sustainable fashion producers seeking a competitive edge in today’s changing supply chains. We believe that with the Presto we are well positioned to take advantage of the growing trend towards customized fashion, home décor and on-demand fabric printing, where there is an increased focus on sustainable production. We began selling the Presto commercially in the second quarter of 2019, four years after having introduced our initial DTF digital textile printing solution, the Kornit Allegro in the second quarter of 2015.
In October 2021, we introduced the Presto MAX. The Presto MAX is the first digital print system to offer white printing on colored fabrics, enhancing decoration capabilities for dark colored fabrics more broadly. In addition, the Presto MAX is the only single-step solution- and the most sustainable solution available- for direct-to-fabric printing, delivering quality, soft feel, with whites and brighter neon colors. As mentioned above, the MAX technology enables our new Presto MAX to utilize the innovative XDi technology, enabling our customers to cater to new market verticals and to offer completely differentiated, high-value applications.
Kornit Presto MAX is compatible with natural, synthetic, man-made and blended fabrics, and includes advanced algorithms infrastructure for smart automatic calibration, to deliver high-quality results with short cycle times and minimal manual interruptions or defects. The system was designed for compatibility with the KornitX global fulfillment ecosystem to enable anywhere, anytime production, supporting a true distributed on-demand sustainable production model with fulfillment closer to the end consumer, eliminating time and logistical waste, while empowering brands to ensure quality and consistency across all systems and production sites.
Kornit Presto MAX provides the cornerstone of a smart, efficient, sustainable EcoFactory that empowers producers to cover and integrate more parts of the process, from design to finished product, to decrease their carbon footprint, water consumption, and energy, and to utilize automation to increase productivity and generate less waste. This means eliminating excess time, labor, and shipping throughout the value chain, enabling proximity on-demand production to meet the accelerated demands of a web-driven global marketplace-revealing new sales channels and clever business models to grow the business long-term.
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KornitX
Building on our acquisition of Custom Gateway and the expanding installed base of Kornit systems, in May 2021, we announced the establishment of KornitX. KornitX is a key building block in our execution plan to become the operating system for on-demand sustainable fashion. KornitX provides an end-to-end solution, connecting demand generators and e-commerce channels to sustainable on-demand fulfillment across the globe, utilizing its digital software platform and a global fulfilment network of on-demand manufacturers and fulfillers.
Our Competitive Strengths
Leading player in the fast-growing industrial digital DTG market. We are the leading player in the fast-growing, industrial and mass production, digital direct-to-garment, or DTG, market based on our sales, and have approximately 1,300 active customers globally. We have been revolutionizing the industry since 2005 and have developed a robust solutions portfolio and scaled our go-to-market infrastructure over the course of this period. Other than our unique intellectual property and technology, and our robust go-to-market infrastructure, our application experts have the best industry knowledge. Consequently, we believe we can greatly support and advise our existing and future customers with the best-known methods to optimize their production environments. Our unique DTG product offering includes novel embellishment applications leveraging our XDi technology and a long roadmap of new consumables and applications. In addition, we introduced an automation journey available on the MAX platforms starting with automatic loading and unloading with a clear pathway to establishing a lights-out factory. We focus on the rapidly growing high-throughput DTG and direct-to-fabric, or DTF, segments of the printed and decorated textile industry. In the DTG segment, based on our assessments of third-party market data, we project the number of annual impressions (including relevant printed or embroidered impressions on, for example, t-shirts, hoodies, pants, bags, etc.) to grow from approximately 21 billion in 2020 to approximately 31 billion on an annualized run-rate basis by the end of 2026. We estimate that only approximately 1% to 2% of these DTG impressions are digitally printed today. Within the DTG market, we estimate that in 2020 approximately 70% of impressions were from brands and private labels, making it the largest portion of this market, while approximately 20% of impressions were from the promotional portion of the market and approximately 10% of impressions were from the customized design portion of the market. The COVID-19 impact to growth rates varies, resulting in both tailwinds and headwinds across the different segments of the market. In the roll-to-roll market, based on our extrapolations from third-party market data, we project the total square meters of fabric printed to grow from approximately 39 billion in 2020 to approximately 42 billion by the end of 2026, considering the fluctuation in demand caused by COVID-19 and recent macroeconomic dynamics, with only approximately 6.5% being printed digitally today. We, therefore, believe that our leadership position, combined with continued technology innovation, and operational improvements, will allow us to grow our business in the coming years.
Well-positioned to disrupt the DTF market with our unique single-step manufacturing solution. We believe we are well positioned to capitalize on the growing trend toward on-demand home décor with our unique DTF solution. Our Kornit Presto Max system (like our former Kornit Presto and Kornit Allegro), combined with our proprietary process, was designed to offer a single-step manufacturing solution which is especially suited for businesses which do not have a vertically integrated textile mill. Unlike other digital textile printers, the Kornit Presto Max does not require multiple pre-processing and post-processing steps that are customarily used in vertically integrated textile mills and that utilize high levels of energy and space and have a negative environmental impact. Kornit Presto Max unique single-step process prevents water waste and pollution by eliminating the pre/post-treatment and washing of the fabric. Given its architecture, it is perfectly suited for short and micro runs. The Kornit Presto Max is compact in size, requires a single person to operate, and fits very well in an urban and non-industrial setting. The Kornit Presto Max unique pigment solution provides the ability to print high-quality designs on multiple fabric types without the need for different inks and consumables, while generally other systems and technologies for DTF digital printing require the dedication of discrete printers to specific fabric types. The rising market need for a sustainable and fabric-agnostic process to support short manufacturing runs is pushing the demand for digital pigment solutions. The Kornit Presto Max is the first digital print system to offer white printing on colored fabrics, enhancing decoration capabilities for dark colored fabrics more broadly. As mentioned above, the MAX technology enables our new Presto MAX to utilize the innovative XDi technology, enabling our customers to cater to new market verticals and to offer completely differentiated, high-value applications.
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Disruptive technology that enables our customers to adopt new, or improve existing, business models. Our digital printing solutions allow our customers to develop new, or improve existing, business and operational models by enabling them to produce short to medium runs of high-quality customized garments efficiently. This facilitates online business models that require an on-demand and made-to-order basis and allows brand owners to produce and decorate garments in-house. With a constantly growing worldwide active customer base of approximately 1,300 customers, we are witnessing the creation of a global fulfillment network of printing specialists that are leveraged by large numbers of websites that offer customizable garment printing services. As demand from these customers grows, so does the utilization of our systems, which in turn print more impressions, consume more ink, and once used to their full capacity, will require the purchasing of additional systems. In November 2020, we formed a new business line, founded on the basis of Custom Gateway, focused on enabling brands, retailers, licensors, and marketplaces to realize the benefits of digitization by connecting them to the most suitable on-demand production and logistics operations, while ensuring consistency, quality and brand integrity.
Environmentally-friendly printing processes. A significant portion of global industrial water pollution comes from textile dyeing, printing and finishing. We believe that environmental factors are beginning to assume a significant role in the decision-making process of our existing and potential customers, with an increasing number of countries adopting restrictions on the use of technologies like screen printing that generate significant wastewater. Our printing process eliminates the need for separate pre-treatment, as well as steaming, washing or rinsing of textiles during the printing process, which leads to a significant reduction in water consumption compared with conventional printing methods. In addition, our inks are certified by leading industry groups as being safe for system operators, consumers and the environment. Finally, our systems offer energy saving processes that result in the use of significantly less power compared with traditional printing processes. We believe that these environmental benefits will further drive market penetration of our solutions and enable manufacturers to move production closer to the consumer in a cost-effective manner.
Attractive business model. We currently offer a broad portfolio of differentiated digital printing solutions for the digital industrial and mass production DTG market. Our existing and growing installed base of systems results in recurring sales of ink and other consumables, which are specially formulated to enable our systems to operate at the highest throughput level. These recurring sales are generated at attractive gross margins. Recurring sales of ink and other consumables have historically offered us a degree of visibility into a significant component of our operating results. We believe that our recurring sales model also enables us to foster close customer relationships, as it facilitates ongoing engagement with our customers, positioning us to provide tailored solutions and expands our ability to provide value-added services to our customers. Our customer relationships are further strengthened by a trend towards the ownership of multiple systems, as the number of customers with at least two systems has grown from 155 as of December 31, 2014, to 300 as of December 2022. The number of customers with at least 10 systems has grown from 9 as of December 31, 2014, to 16 as of December 31, 2022. We anticipate that revenue from services will increase over time as our growing installed base begins their respective upgrade cycles and we continue to expand our service contracts business model. Additionally, our high throughput systems, such as the Vulcan Plus, Atlas MAX, Atlas, Avalanche, and Presto systems, generally driver higher sales of ink and other consumables. Large customers typically run at high utilization rates and can consume up to five times as much ink per year compared with other customers. By developing and implementing proprietary end-to-end solutions for our customers, we believe our business model is differentiated from more commoditized solutions serving the same end markets. We have proven our ability to grow revenues while maintaining an attractive margin profile and we intend to continue investing in our business to drive profitable growth in the future.
KornitX adds an additional layer of revenue to Kornit’s business model from on-demand product generators, such as brands, retailers, creators, as well as print service providers and fulfillers. The KornitX business model earns revenues from software subscription fees, transaction charges, professional services, and on-demand product fulfillment.
Product upgrade strategy. In 2016, we began to implement a long-term strategy to support our installed base with upgrade paths to newer, more advanced, systems. The goal of this strategy is to allow our customers to extend their return on investment in Kornit systems, and in return, we enjoy growth in system utilization and on-going capital investments in our equipment.
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Product refurbishment strategy. In 2019, we introduced a new line of factory refurbished systems, based on the Avalanche and Storm platforms. This line of business enabled us to expand our product offering with the latest technology capabilities at different price points, as well as provide us with maximal control over any after-market activity. This initiative made it easier for our existing customer base to adopt our latest technology as they traded in their existing relevant installed base, which in turn found its way to new customers who were more sensitive to capital expenditures. As a part of our sustainability strategy, this line of business enabled us to re-use systems, sub-modules and other parts to their fullest potential and life expectancy, thus reducing waste and other environmental impacts of unnecessary production of new systems. In 2021, we changed our strategy to the sale of used systems, in place of refurbishment of systems. The selling of used systems is our preferred approach for the aging Storm and Avalanche configurations. The sale of used systems appears as a more sustainable procedure, which maintains the original advantages of our refurbishment strategy including re-using sub systems; reducing carbon footprint; and providing lower price printing solutions.
Robust intellectual property portfolio driven by an innovation-based culture. Our intellectual property portfolio reflects over a decade of significant investments in digital textile printing, which we believe creates significant barriers to entry. We have developed a strong base of technology know-how, backed by our portfolio of intellectual property, which includes 79 issued patents and 30 provisional or pending US applications, 34 pending non-US patent applications and 16 pending PCT applications that cover wet-on-wet printing methodology, ink formulations, printing processes and related methods and systems. Our team of over 239 researchers and developers, including chemists, electrical engineers, system engineers, software engineers and mechanical engineers, ensures that our systems remain technologically advanced, and are well engineered, user-friendly and highly reliable.
Extensive product portfolio, strong new product pipeline and end-to-end solutions. With throughput ranging from 40 to 235 garments per hour, our DTG systems are suited for smaller industrial operators with limited budgets, as well as mass producers with complex needs. Since 2015, we have commercialized several new solutions in the DTG market, including: the Vulcan and (In January 2020) the Vulcan Plus, which are cost-effective, digital substitutions for carousel screen printing and high-capacity, industrial DTG systems. The HD family of solutions (including, in January 2020, the Storm HD6 Lite refurbished system); The Atlas, our high throughput mass production digital DTG system; Beginning in April 2019, our specialty DTG solutions- the Avalanche Poly Pro, enables digital printing on a variety of polyester products and other fabric types, including cotton, cotton-polyester blends, silk, leather, denim, linen and wool.
Our MAX technology, which was first introduced on the Atlas platform in April 2021, opened a new category for DTG, offering the highest retail quality to meet the needs of leading fashion and sports brands. The MAX technology offers a significant incremental value to our installed customers through upgrades, as well as to new customers targeting new market verticals. Our MAX technology is another key milestone in our roadmap as it opens new market categories for our customers to serve, as well as enabling never-seen-before high value applications such as XDi, enabling our customers to further establish their competitive differentiation, expand their business and improve their profitability. Our future roadmap remains focused on the continued development of proprietary processes, continuously expanding the breadth of applications upon which we can print while pushing the envelope of cost-efficient manufacturing further as a means to expand our serviceable addressable markets and maintain our customers’ leading market position.
We extend our business reach and solution scope for our customers with KornitX, an end-to-end solution for on-demand, sustainable manufacturing and fulfillment of fashion. KornitX includes a robust, cloud-based software platform with a wide range of services to digitally transform our customers’ operations. Our mass customization, personalization, and workflow solutions provide expanded product offerings and customer segments, higher efficiency and productivity for on demand fulfillers, as well as enable new business from various online channels, both B2B and B2B2C. Kornit Konnect, our operational data analytics and business intelligence solution, provides transparency and manageability to our customers, enabling them to monitor production, performance and usage throughout their fleets. Konnect also enhances their ability to plan and manage activity by providing valuable metrics such as ink consumption, types of prints and garments, as well as comparison between time frames and machines. Our offering is further enhanced with image processing software solutions provided by our partners.
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Our aim is to provide a wide set of solutions to our customers, based on our familiarity with the industry and customers’ needs. Based on that, we are approaching the market with end-to-end solutions in mind, combining hardware, consumables, software and services, built around the primary offering of printers and ink and enhanced by the software workflow range of integrations and functionality scope.
The KornitX software platform addresses two types of target audiences: demand generators and print providers (fulfillers.)
| ● | Solutions for print service providers; and |
| ● | Solutions for demand generators (e.g., brands, licensors, creators, retailers and online commerce platforms). |
Our KornitX platform focuses on enabling brands, retailers, marketplaces and other demand generators to realize the benefits of digitization by connecting to the most suitable on-demand production and logistics operations, while ensuring consistency, quality and brand integrity.
KornitX manages and routes all orders from demand generators through an extensive global fulfillers network which offers global, on-demand, sustainable unlimited manufacturing capacity with best quality assurance, mainly by utilizing Kornit’s access to on-demand fulfillers.
The KornitX platform
includes a wide variety of features, functions, and services that make it easy for on-demand fulfillers and demand generators to source,
create, manage, sell and fulfill dropship products.
The platform enables the import and management of orders for on-demand, personalized and virtual stock products from multiple sales channels
for fulfilment. Customers can create, manage, and share virtual product data and turn orders into print jobs organized in a production-ready
manner. The platform also manages blank products and inventory for stock management.
| ● | With KornitX, on-demand fulfillers can automate end-to-end production processes on the factory floor with an industry-leading scan point workflow, improving efficiency and visibility of each order. | |
| ● | Finally, KornitX offers a global fulfillment network (GFN), which is a world-class group of fashion, textile, and print-on-demand fulfillers, providing print services to the world’s top fashion brands, retailers, licensors and other demand generators, enabling them to fulfill closer to the end-customer and to guarantee the highest quality on every order. |
At the heart of a true industrial revolution, or Textile 4.0. Every digital printing revolution starts with printing small quantities of particular designs where the advantages of digital technology are most pronounced. The ability to expand the addressable market of digital printing relies heavily on constant reduction of cost per printed unit (CPP). Given our deep technological foundations, we have been able to constantly reduce CPP by increasing system output, as well as increasing the efficiency of our inks, allowing customers to consume less ink while achieving excellent results. Given this progression, we are now able to offer a cost-effective alternative to screen printing for runs of up to 500 garments, making our products a viable printing solution for large scale retailers who now seek to move to quick inventory replenishment and are constantly moving to shorter runs of production.
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Strong management team. Our Chief Executive Officer, Ronen Samuel, and our Chief Financial Officer, Lauri Hanover, bring extensive experience of management roles in publicly traded companies and/or in management roles in the printing industry. Our management team’s industry expertise and extensive experience in running global companies will enable us to execute our growth strategy. Our management infrastructure also includes executives who are experienced in the management of people, large scale business, innovation, product development and acquisitions in larger public organizations, including HP, Amazon, Applied Materials, NICE, Amdocs and Mitsubishi Fuso Trucks of America. Since 2013, our workforce has grown from 190 to 934 as of December 31, 2022, as we strategically invested in human resources to support our growth. Additionally, more than 417 of our employees are in regional locations, enabling us to provide more localized service to our customers.
Our Strategy and Catalysts for Growth
As we look at the trends that are shaping our industry and consumers’ behavior, we identify many opportunities to transform the way the industry operates from end to end. From a polluting, analog and inefficient system to a digital and sustainable one. We are connecting consumers and demand generators like fashion brands, marketplaces, designers, merchandisers and creators to the most advanced digital production floors around the world by becoming the operating system for on-demand, sustainable fashion (fashion includes apparel, home décor, and other textile-based forms of self-expression). The operating system has a few key elements:
The first key element focuses on the production floor. We are digitizing the production floor by growing our tech leadership and solution offering. We are strategically focused on investments in our research and development, product management, solutions and applications development areas to continue driving innovation and automation within the industry, thereby allowing our customers and prospects to grow their businesses by enabling them to expand their product offering with additional applications, designs, and fabric types. We focus on constantly removing barriers as they relate to quality, hand feel, and cost. . We will continue to drive the productivity of our technology to allow existing and future customers to cost-effectively obtain new jobs, and transfer existing recurring jobs and impressions from analog to digital printing, which we believe will drive increased sales of systems, consumables, software and services. As part of our strategy, we will continue to bring to the market solutions that enable efficient mass production and customization in a rapidly transforming industry that is shifting to shorter production runs and mass production of on-demand, at times one-by-one orders. Our latest unique innovative technology offering includes novel embellishment applications that are replacing many of the applications that were once before producible only with analog methods. This is made possible by leveraging our XDi technology and new consumables. The acquisition of Voxel8 and the future integration of its technology to create new decorative and functional application is another important step in digitizing production process by replacing existing applications and enabling never-seen-before ones. In addition, we introduced an automation journey for our MAX platforms, starting with automatic loading and unloading with a clear path for streamlining production and a lights-out factory. Our expansion of our cloud software workflow solutions via the acquisition of Custom Gateway and the formation of KornitX are direct execution initiatives of this strategy. KornitX workflow solution provides the software layer of the production floor management, driving an efficient manufacturing process with high visibility and performance measurements throughout the entire process. Orders are routed automatically to the production floor and managed to facilitate efficient on-demand production on a mass scale. The technology enables customers to realize the full benefits of digitization by seamlessly connecting the front end to the most suitable back-end element. We believe that removing market barriers includes periodically introducing to the market innovative digital processes that address key industry pain points and gaps, which traditional analog techniques cannot handle, do so with poor quality, or do so in a non-cost efficient or non-environmentally sustainable manner. We believe that continuing to remove market and technology barriers and developing new features and functionality of our solutions will allow us to win new customers and increase system, consumables, software and services sales to existing customers.
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Another key element of the operating system is establishing KornitX as the virtual layer of the on-demand production workflow, connecting the front-end with the back end. KornitX is the engine and the brain behind the operating system, managing every aspect of the end-to-end process. The KornitX solution connects the virtual demand with the physical supply by capturing impressions generated in the front-end and using its smart routing engine - assigning them to the best suitable production location. This enables a true on-demand, sustainable manufacturing process that supports consumers’ immediate gratification. KornitX is the enabler of the massive opportunities for the end-to-end on-demand workflow, in both B2C and B2B environments across different verticals, including fashion, sports, music, entertainment, influencers, gaming and broader creator and merchandiser communities. We are focused on four execution areas of this key element:
| ● | Scaling the global fulfillment network to offer a close-to-the-consumer endless-supply model for demand generators. |
| ● | Investing in tech layers of the KornitX platform, such as automation, and data-driven decisioning. |
| ● | Enriching our front-end offering, with content creation, content management, visualization, and smart connectivity APIs. |
| ● | Forming additional strategic alliances with mega-platforms and marketplaces. |
The following are additional elements of our growth strategy and catalysts that will drive our business expansion:
Expanding in Key Markets
We plan to continue growing our customer base by targeting new customers in markets that are adjacent to those in which we have been operating. To date, we have primarily catered the customized design market, consisting of online businesses of different sizes, focused mainly on mass customization and personalization that are enabled by using our technology. An example of our success in this market is the Master Purchase Agreement, that we entered into on January 10, 2017, with an affiliate of Amazon.com, Inc. To date we have supplied systems, large quantities of inks and consumables and paid services have to multiple facilities under the agreement. During the years 2021 and 2022, Amazon-related revenues were $87.0 million and $73.2 million, respectively. In September 2020 and November 2021, Amazon exercised its vested shares under the warrant agreement signed in 2017 and immediately entered into a new transaction in September 2020 pursuant to which Kornit issued Amazon a warrant to acquire Kornit’s shares. The shares underlying the new warrant are subject to vesting as a function of payments up to an aggregate of $400 million by Amazon over a five-year period for two different categories of product lines and services. The newly signed agreement with Amazon expresses the close partnership with Amazon and the trust Amazon has both in the existing and future Kornit solutions. We expect that our relationship with Amazon will continue to expand in the future and that they will remain a significant customer. We expect continued growth with other existing customers in the customized design market as those customers seek capacity growth, provide new applications and expand into new market segments and geographies. We also expect to add new customers in the customized design market, as the market continues to grow and develop. With the breadth of our existing portfolio and our continued investment in features and functionality, we believe we are well positioned to expand our market reach by penetrating adjacent markets in the form of traditional and start-up brands, private labels, and the promotional market, in which we can drive adoption of digital DTG and DTF printing solutions in place of analog screen-printing production methods, which are currently primarily relied upon in these markets. While we have started to penetrate these markets, directly or via third-party fulfillers and decorators, we plan to deepen our reach into these important markets as they seek to transform their business and operating models.
Maximize Impressions
We are focused on increasing sales to existing customers by introducing new digital printing applications, developing new features and functionality of our systems, offering new system upgrade products to make it easier for customers to renew their fleets and update their install base to the latest technology available, increasing sales of software, offering customers empowerment program inclusive of basic and advanced training, with a goal of enabling our customers to increase utilization of their systems. With our move into solution selling, we are focusing on providing our customers with value added services including training programs, proactive services, production consulting and end-to-end workflow improvements. Through these value-added services, we are able to increase system availability and utilization, end-user product quality, and to increase impressions. We also intend to actively refer business to our customers by connecting them through our cloud software workflow platform with online businesses that seek fulfillment partners, which we believe will improve our business relationship with our customers. Our objective is to help customers operate their businesses more efficiently, print more impressions and increase utilization of their systems, thereby requiring more ink and other consumables purchases as well as potential investment in new systems as they require additional capacity.
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Expanding our GTM
We continue to strategically invest in our go-to-market infrastructure across geographies, including in our sales, applications, and services teams. While maintaining an overall hybrid go-to-market strategy that includes both indirect and direct sales, we have adopted a direct sales model in North America, Germany, Poland, and the United Kingdom, and are assessing moving towards that model in additional key markets. In North America, we initiated the transition towards direct sales via our acquisition of the U.S.-based digital DTG printing assets of SPSI in 2016, in which we acquired an increasing number of larger accounts, which require a more direct relationship between our company and the related customers. We completed the transition in North America to a full direct sales model in February 2019, with our acquisition of customer business assets from Hirsch, our former primary distributor in the United States and Canada. By fostering direct sales relationships with our North American customers, we have been deepening our relationship with them, and better aligning our product roadmap to meet their needs.
Strategic accounts are an important and valued part of our business and future growth, and we continue to make the appropriate investments in ensuring we serve their needs as it comes to sales, application consulting and services support. We expect to continue developing our strategic accounts practice in a combination of dedicated regional and corporate resources as we strive to help these important customers improve their business performances by delivering best-in-class customer experience.
We are seeking to increase the number of customers that rely on us to provide services for their systems by expanding our service capabilities and driving adoption of our portfolio of services contracts. As of December 31, 2022, we had service contracts in place with approximately 44% of our industrial and mass production installed base. Service revenues were $49.0 million in 2022. In addition to driving gross margin improvement, we believe this provides us with an opportunity to work directly with customers with the goal of reducing system down-time, educating customers on how to optimally use our systems to drive increased utilization and growth in impressions printed, expanding the variety of print applications, as well as increasing sales of post-warranty service contracts and other professional application development services.
Extend our leadership position through acquisitions and strategic partnerships
We seek to continue to differentiate ourselves and extend our leadership position. From time to time, we may supplement our internal efforts with complementary inorganic initiatives such as acquisitions and strategic partnerships to enhance our positioning. For example, our acquisition of Polymeric Imaging in 2015 expanded our ink technology capabilities, our acquisitions of the digital DTG printing assets of SPSI in 2016 enabled us to strengthen our direct sales channel and gain access to a large screen-printing customer base, and the acquisition of business assets from Hirsch in 2019 helped us transition to a full direct sales model in North America.
Our acquisition of Custom Gateway, a provider of cloud-based software workflow solutions with innovative technology, in August 2020, enabled us to offer an end-to-end on-demand production solution for our customers. Upon the acquisition of Custom Gateway and the integration of its solution, we established KornitX. We aim to strengthen and expand the KornitX solution both organically and inorganically. Some of the inorganic directions we are strategically exploring include technological components in the connectivity layer of KornitX, such as automation, AI and data-driven decision making, and enriching our front-end offering with tools such as virtual creation, content management, marketplaces, and visualization. We expect the combination of KornitX software workflow portfolio with our existing and future technologies to bring to the market an end-to-end solution for on-demand production.
Our acquisition of the assets of Voxel8, an advanced additive manufacturing technology for textiles, provides us digital fabrication of functional features with zonal control of material properties, in addition to the use of high-performance elastomers that adhere to inkjet technology. Our acquisition of Tesoma, a provider of high-quality engineering and high-performance, cutting-edge, textile curing solutions, which closed in April 2022, is an important part of our strategy to add smart automation capabilities within our innovative, sustainable, on-demand production solutions, empowering customers to improve productivity, optimize quality, and reduce the total cost of ownership-all in a more sustainable production environment. Each of these acquisitions has enhanced the positioning of our company. Future acquisitions may also allow us to strengthen our existing portfolio of solutions or add new capabilities.
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Our Products
Direct-to-Garment (DTG) Systems
In 2019, we started consolidation of our core DTG products portfolio to rely on our HD technology. The HD technology enabled our customers to produce retail-quality prints with competitive cost per print. This represented a clear focus in our product offering, supporting our strategy to penetrate the market segment of brands and private labels. The combination of our HD technology, together with the Eco-Rapid ink-set, introduced in January 2019, enabled our customers to produce retail-quality prints with competitive cost per print, allowing them to replace screen printed jobs, including those targeted for the retail market. Leveling up our product portfolio to the superior performance of our HD technology allowed us to execute our screen-replacement strategy across different market segments and a variety of customer types and sizes. The underlying strategy behind this system lineup was to accommodate a variety of customer types with the highest digital printing capabilities at a variety of productivity levels and price points, enabling them to produce the same retail-quality at the same CPP on all our HD systems. The differentiation across our line of HD systems was mainly based on system productivity and total cost of ownership, with a clear benefit to our higher productivity systems.
Yearly Output DTG Portfolio
| System | Output range* | |||
| Storm HD6 Lite | 50K-60K(1) | |||
| Storm HD6 | 96K165K(2) | |||
| Avalanche HD6 | 237K-360K(3) | |||
| Atlas | 422K-640K(3) | |||
| Atlas MAX | 330K-500K(3) | |||
| Vulcan Plus | 620K-940K(3) | |||
| Atlas Max Poly | 266K-400K(3) | |||
| * | Yearly output measured in high productivity print mode (13“X13”, Dark) |
| (1) | The calculation is based on productivity of 8 hours shift in the range of 220 working days to 250 working days. |
| (2) | The calculation is based on productivity range of 8 hours shift in 220 working days to 12 hours shift in 250 working days. |
| (3) | The calculation is based on productivity range of 12 hours shift in 220 working days to 16 hours shift in 250 working days |
In the beginning of 2019, we launched a new industrial DTG platform - the Kornit Atlas. The Atlas represented our next generation direct-to-garment printing platform, equipped with our next generation HD technology and designed mainly for high-volume garment decoration businesses and mid-to-large size screen printers. With its retail-grade print quality, high productivity and attractive total cost of ownership, the Atlas allows our customers to serve additional market needs and open new opportunities.
In January 2020, we introduced the Storm HD6 Lite Refurbished, which effectively replaced the Kornit Storm II, enabling DTG printing for smaller print operations, such as commercial printers moving to the industrial market and analog printers broadening their production capabilities. It has a production capacity of up to 60,000 impressions annually and provides on-demand DTG printing that meets high-level, retail quality and sustainability standards.
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In January 2020, we also launched the Vulcan Plus, which is currently our highest productivity HD system, with the best total cost of ownership for large production facilities with high volumes of mass customization print jobs. The Vulcan Plus is based on the Vulcan platform, that was introduced in 2016, and was designed based on our customers feedback and field experience with the platform.
Building on the new product introductions of 2019 and 2020, we were able to create an extensive HD product portfolio, ranging all our main product platforms and a multitude of product configurations - starting from the Storm, through the Avalanche, and all the way to the Atlas and the Vulcan. In alignment with our products upgrade strategy, different upgrade paths are available to the HD systems, enabling our customers to equip themselves with new and superior capabilities and improve cost of ownership on their existing systems, expanding their business opportunities and allowing us to earn additional revenues from our existing installed base.
Specialty DTG: In 2019, we established another line of products as a part of our DTG offering - specialty solutions. This new line of products introduces a diversification in our offering, representing our product strategy of solutions. The underlying strategy behind this new line of products is to identify specific market needs and application challenges representing major market opportunities and address them with unique and specific solutions. In 2019, we introduced a new and innovative process for printing on dyed polyester, addressing the cross-industry challenge of dye-migration, when decorating dyed polyester. This new solution was introduced to the market during 2019 on a new system from the Avalanche platform - the Avalanche Poly Pro.
Based on our NeoPoly technology, the Avalanche Poly Pro can print on dyed polyester, using our new and innovative low temperature curing process, thus reducing the challenge of dye-migration that currently exists in all other polyester decoration techniques.
The Avalanche Poly Pro enables the production of on-demand customized polyester products, without minimum order quantity, providing all the advantages of digital printing on polyester. The system can print on a variety of polyester fabrics including poly blends (e.g., poly-lycra, poly-cotton), a variety of fabric builds and textures, including woven and knitted fabrics, as well as on recycled polyester.
In 2021, we launched a new industrial DTG platform - the Kornit Atlas MAX. The Atlas MAX represents our next generation direct-to-garment printing platform, equipped with our next generation MAX technology. The MAX technology introduces new consumables that help produce superb print quality, durability and print speed while allowing optimal ease of use, minimal application tweaking, wider working window, and a significantly larger media variety. In addition, the Atlas MAX introduces the Kornit XDi technology that enables the printing of multiple layers to create unlimited innovative 3D effects and premium applications like mimicking embroidery, heat transfer and vinyl for example. With the capabilities of Atlas Max and the Kornit Xdi technology, our customers are now able to do much more with their printing equipment and enter new premium markets.
In 2022, we released an upgrade kit for our Atlas printer that enables existing customers to upgrade to the Atlas Max. With the new upgrade kit, Atlas users can benefit from the latest technological advancements in digital textile printing, including the exclusive XDi technology. XDi technology allows for printing of high-quality images with greater detail and color depth, making it ideal for embroidery-like printing. The Atlas Max also features advanced software, additional chemistry (Qfix and Intensifier). Overall, the upgrade kit provides Atlas users with superior quality, throughput, and flexibility, enabling them to enhance their production capabilities without having to purchase an entirely new printer.
In July 2022, we introduced the Atlas MAX Poly, which extends our technological capabilities in high quality printing on polyester even further by leveraging the Kornit MAX technology and incorporating it as part of our proprietary polyester printing process which is based on the Neo Olympia ink set. The Atlas MAX Poly harnesses the innovative low temperature curing ink set alongside a new process and consumables to deliver high quality digital printing on polyester as well as delivering improved productivity rates. These new capabilities expand our opportunity within the sports and athleisure spaces. This new platform is also equipped with Neon applications and a proprietary consumable named ProGuard, which acts as a barrier between fabric and print and promotes the inhibition of dye migration.
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Summary of our DTG Systems:
The following table summarizes key aspects of our DTG systems, all of which are compatible with a wide range of fabrics, including cotton, wool, polyester, viscose, lycra and various blends, and print at maximum resolutions ranging from 600 to 1,200 DPI.
| System | Target Customer | Effective Throughput Light/Dark Garments(1) | Colors | Max.
Printing Area | |||||||
| Breeze* | Entry Level | 32/25 | CMYK + White | 14 x 18 in | |||||||
| Storm HD6 Lite | High Throughput | 40/30(2) | CMYKGR + White | 20 x 28 in | |||||||
Storm 1000* |
High Throughput | 170/85 | CMYK + White | 20 x 28 in | |||||||
| Storm Hexa* | High Throughput | 170/85 | CMYKRG + White | 20 x 28 in | |||||||
| Storm HD6 | High Throughput | 70/55(2) | CMYKRG + White | 20 x 28 in | |||||||
| Storm Duo* | High Throughput | 190/N.A | CMYK + White | 20 x 28 in | |||||||
| Avalanche* | High Throughput | 150/100 | CMYK + White | 23.5 x 35 in | |||||||
| Avalanche Poly Pro | High Throughput | 106/85 | CMYK + White | 23.5 x 35 in | |||||||
| Avalanche DC Pro* | High Throughput | 150/100 | CMYK + White + Discharge ink | 23.5 x 35 in | |||||||
| Avalanche 1000* | High Throughput | 220/160 | CMYK + White | 23.5 x 35 in | |||||||
| Avalanche Hexa* | High Throughput | 180/140 | CMYKRG + White | 23.5 x 35 in | |||||||
| Avalanche HDK* | High Throughput | 105/85(2) | CMYK + White | 23.5 x 35 in | |||||||
| Avalanche HD6 | High Throughput | 105/85(2) | CMYKRG + White | 23.5 x 35 in | |||||||
| Atlas | High Throughput | 200/160(2) | CMYKRG + White | 23.5 x 35 in | |||||||
| Atlas MAX | Brand Quality | 125/125(2,3) | CMYKRG + White | 23.5 x 35 in | |||||||
| Paradigm II* | High Throughput | 120/120 | CMYK | 15.5 x 19.5 in | |||||||
| Vulcan* | High Throughput | 250/250 | CMYKRG + White | 15.5 x 19.5 in | |||||||
| Vulcan Plus | High Throughput | 235/235 | CMYKRG + White | 15.7 x 19.7 in | |||||||
| Atlas MAX Poly | High Throughput | 120/98(2,3) | CMYKRG + White | 23.5 x 35 in | |||||||
| * | System undergoing End of Life process. |
| (1) | Maximum output for sellable product for dark and light garments. Output for all systems, except the Vulcan and Vulcan Plus, is measured in High Productivity print mode using A4 size prints per hour with pretreatment included. Output for the Vulcan and Vulcan Plus systems is measured in Standard print mode using 12 x 12 in size prints per hour with pretreatment included. The throughput measurement is based on 10 t-shirt print procedure. |
| (2) | Measurement method changed to 13” x 13” image impression instead of A4. |
| (3) | MAX technology standard – New quality standard in DTG printing to meet the highest retail quality |
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Direct-to-Fabric (DTF) Systems
Presto: The Presto combines a printing system and a drying and curing module so that a full end-to-end manufacturing process is enabled, allows one-step DTF printing. Unlike the Presto, most DTF printers require additional steps. The Presto takes advantage of our patented wet-on-wet methodology to allow for in-line printing on various fabrics, without requiring a separate pre-treatment process, thereby avoiding the need to use textiles that are specifically pre-treated for digital printing. The Presto is designed to achieve high throughput and does not require water or steam for any part of the printing process, making the system environmentally friendly. By using our proprietary pigment-based ink, Presto can print on a variety of natural and synthetic fabrics providing customers with a significant level of flexibility. Most other dye-based systems are specifically designed to print on specific fabric types and cannot be used with other types of fabric as the processes and consumables used vary considerably from one to the other.
Presto MAX: The Presto MAX is the first digital print system to offer white printing on colored fabrics, enhancing decoration capabilities for dark-colored fabrics more broadly. The Presto Max is also the only single-step solution-and the most sustainable solution available for direct-to-fabric printing, delivering quality, soft- feel, with whiter whites and brighter neon colors. The system was designed to incorporate future iterations and evolutions of Xdi technology-3D decorative applications to produce threadless embroidery, high-density, vinyl, screen transfer, and other innovative effects.
Kornit Presto MAX is compatible with natural fabrics, synthetics, and blends, and includes advanced algorithms infrastructure for smart automatic calibration, to deliver high-quality results with short cycle times and minimal manual interruptions or defects. The system was devised for compatibility with the KornitX global fulfillment ecosystem to enable anywhere, anytime production, supporting a true distributed production model that fulfills nearer the end-consumer, eliminating time and logistical waste from the experience while empowering brands to ensure quality and consistency across all systems and production sites.
Ink and Other Consumables
Kornit NeoPigment™ inks are water based, non-toxic, phthalate free and free of heavy metals and follow the highest international sustainability standards such as Eco-Passport, GOTS and per specific customer requirements. Our ink and consumables consist of our patented NeoPigment™ ink, proprietary binding agent, priming fluid, wiping fluid and flushing fluid. We categorize our line of inks into two category groups: Direct-to-Garment and Direct-to-Fabric.
We have a series of ink sets for our DTG systems, including NeoPigment™, NeoPigment™ Rapid, NeoPigment™ Eco-Rapid and NeoPigment™ Olympia. The first two ink sets are designed for Kornit legacy products, while the Eco-Rapid is the most advanced ink set designed for retail quality. These three ink sets are available in seven colors (W+CMYKRG) and a complementary binding agent. NeoPigment™ Olympia is designed for our polyester printing system, the Avalanche Poly Pro and the Atlas MAX Poly, and is available in five colors (W+CMYK), with an enhancer for the Avalanche Poly Pro and 7 colors (W+CMYKNyNp) on the Atlas MAX Poly. The printing process is unique and innovative, specially designed for polyester printing to overcome challenges by implementing four crucial steps. The first step, a fixation agent specially designed and formulated for polyester fabrics. The second step, a white layer with special properties resulting in a high-quality white color, high opacity and elastic properties for high performance. The third step, CMYK printing, allows for an increased color gamut and spot color matching and finishing with a poly-enhancer, designed for high quality finishing with improved durability and refined hand-feel.
For our Direct-to Fabric systems we have two ink sets: NeoPigment™ Intenso and NeoPigment™ Robusto. The inks are designed for our roll-to-roll systems and consist of six colors (CMYKRG), with the Intenso holding additional fluorescent colors and a light-K color. Our current Direct-to-Fabric customer bases only uses NeoPigment™ Robusto as we no longer sell the NeoPigment™ Intenso. With our Direct-to-Fabrics ink we have developed and patented a fixation on the fly (FOF) process. This unique consumable allows to print in a single step solution, avoiding the need of fabric pre-treatment and enabling minimal environmental impact. In March 2020, Kornit announced the release of a new NeoPigment™ Robusto Softener. This solution eliminates a key barrier with pigment-based printing, which enables a softer hand-feel, and is mostly required by brands. In October 2021, we introduced the Presto Max with NeoPigment™ Duosoft that is replacing the FOF and the NeoPigment™ Robusto Softener. The Duosoft has two actions in one- enabling softer hand feel and performing fixation on the fly (FOF).
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All our inks are formulated for optimal use exclusively in our systems. Our patented wet-on-wet printing methodology involves spraying a wetting solution on the fabric before applying our proprietary pigment-based inks. This unique capability enables our systems to reach high throughput levels while still producing high quality images and designs. The wetting solution prevents the ink from bleeding into the textile and fixes the ink drops, which enables digital printing with high color-intensity and image sharpness. This printing methodology combines the use of pigments rather than dyes in conjunction with our proprietary binding agent and allows us to print on a wide range of fabrics without the need for a separate pre-treatment process or system reconfiguration, resulting in minimal setup times for each run and high throughput levels. Given the proprietary nature of our printing methodology, our ink and consumables attachment rate is close to 100%. We also continuously invest in the development of new ink formulas for our systems in order to expand the range of applications we can print, further increase the quality of our high-resolution images and designs and improve color fastness.
We have developed two patented methods for printing on dark or colored fabrics. The first method involves printing a layer of specially formulated white ink as a base upon which to print colored images and designs. Printing on top of this foundation enhances color intensity and creates contrast against dark or colored fabric. In addition, we have developed a patented discharge ink for printing on dark or colored fabrics. The discharge ink bleaches the fabric dye and applies colored ink in the locations where the discharge ink removed the fabric dye. This method, which is primarily used by brand owners and contract printers, allows the printing of high-resolution images and designs without compromising the texture or feel of the garment.
Software Solutions
Our DTG systems arrive with our QuickP Production software embedded. The software manages the system operation and prepares image files for print. QuickP Production is a simple to use solution that allows users to control key operating parameters, such as print resolution, perform maintenance and calibration procedures and import image files and prepare them for print.
Some of our customers also purchase our QuickP Designer software. QuickP Designer is a software package that combines our own internally developed Raster Image Processing, or RIP, software with other print job management capabilities and includes an advanced ink consumption estimation tool. A single QuickP Designer license can be used to support multiple Kornit systems.
In 2018, we introduced to the market a new professional RIP software offering in collaboration with ColorGate. This offering allows customers to enhance our systems’ performance in the areas of print quality and color management, allowing them to achieve superior results and manage high-end color demanding applications. The combination of this new product offering, together with our HD technology, also serves our screen-printing replacement strategy, allowing our customers to achieve color accuracy and matching to screen prints.
In June 2019, we introduced Kornit Konnect, our cloud-based, software analytics connectivity platform that enables businesses to maximize productivity of their digital printing solutions. In its first phase, Kornit Konnect enables businesses to monitor production, analyze insights and manage their fleet, in order to eliminate blind spots. It includes a fleet management dashboard, data driven benchmarks, actual production costs, and cost structures per job, making it easy for businesses to learn more, react faster and perform better.
In August 2020, we acquired Custom Gateway, a leading global provider of cloud-based software workflow solutions for both B2B and B2C business models. Custom Gateway’s solution enables Kornit to offer customers an end-to-end solution for on-demand production.
KornitX’s technology, which is based on our acquisition of Custom Gateway, connects front end, web-based demand generators such as on-line stores and on-line brands as well as licensors with a digitized fulfillment process, enabling a digitized on-demand manufacturing process. With the KornitX production floor solution, orders are routed and managed to facilitate efficient on-demand production on a mass scale. The technology enables customers to realize the full efficiency, scalability and profitability benefits of digitization by seamlessly connecting the front end whether online or storefront, to the most suitable back-end element.
KornitX’s solution also enables us to facilitate smart connectivity, for operational and business transactions between multiple stakeholders in the on-demand manufacturing ecosystem, such as brands, licensors, retailers, blank providers and digital printers.
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Our Services
Our services offering consist of maintenance and support, consulting and professional services. We continue to expand our services capabilities and aim to increase the number of customers that rely on our service for their systems. As of December 31, 2022, we had service contracts in place with approximately 44% of our industrial and mass production installed base. Beginning in 2020, each industrial system sale included a service contract, according to our policy, driving an increase in services revenues. Service revenues totaled $49.0 million in 2022. In addition to driving gross margin improvement, the services we offer provide us with the opportunity to directly work with customers with the goal of reducing system down-time, educating customers on optimal systems use to drive higher utilization, expanding the variety of print applications, as well as increasing sales of post-warranty service contracts and other professional application development services. Our services ultimately help our customers increase system utilization and the number of impressions printed.
Maintenance and Support
In 2019, we began to provide a warranty, typically for a six-month period, covering parts, labor, and remote support. At the time of sale, our customers usually purchase support for an additional year of coverage. After this period, customers can renew their support contract by purchasing a support package that includes remote support, on-site support, software updates, and annual on-site maintenance. Alternatively, customers can choose support on a time-and-materials basis. In the United States, we provide direct service to all of our customers. In the EMEA region, we provide direct service to more than half of our installed base, while the other half receives support through our independent distributors. In the Asia Pacific region, service is provided by our independent distributors, while we provide a second line of support if needed.
Professional Services
Even though our systems are designed for customers to operate them without the assistance of our company or our independent distributors, we provide a Customer Empowerment Program to ensure an efficient knowledge-transfer process and to help our customers become proficient and independent at operating their systems in a short period of time.
The Customer Empowerment Program is composed of four touchpoints:
| ● | Digital Touchpoint: Available prior to system installation at the customer site, with access to a variety of online tutorials and documentation. |
| ● | Basic Technical and Application Training: A five-day course in our training center that includes an overview of the system and allows the customer to practice performing typical maintenance, application, and operating procedures. | |
| ● | Installation Training: Consists of a three-day on-site training during the installation of the system to ensure the machine is up-and-running as expected. |
| ● | Ramp-up Training; Includes three-to-five days of professional services, which consist of customized consulting aimed at optimizing the use of our systems. These professional services are provided at our regional offices or at customer sites. |
We have furthermore established three training centers at our regional offices in the US, Germany, and Hong Kong, respectively. We continuously seek to expand the number and content of our training programs.
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Our Customers
Our diverse global customer base consisted of approximately 1,300 active customers as of December 31, 2022. Our growing installed base serves a variety of business models, in particular, those that have developed to respond to quickly changing consumer trends and to the growing online retail market. Our solutions enable this category of “on-demand” businesses to fulfill consumer orders more quickly and cost-effectively in a manner that is differentiated from traditional brick and mortar businesses. A number of large-scale, on-demand platforms have emerged, with these often-leveraging digital printing solutions to facilitate business for other content providers.
The ecosystem of on-demand businesses that we currently serve fulfill for e-commerce and for high street and other brands and includes:
Self-Fulfillment. Companies manufacturing and selling their own designs advertised on their own websites and other marketing means.
Hybrid Printers. Companies that manufacture both in-house and outsource to third party fulfillment providers, who are often also our customers.
Third Party Fulfillment Centers. Companies serving as third party fulfillment for other businesses. Third party fulfillment providers include a number of our customers. Demand for these businesses is typically generated online through other web retailers and brands who are looking for a flexible inventory management solution and offer quick reaction to trends and consumers demand.
Proximity to the end customer is a key factor for these businesses since it minimizes shipping costs and enables them to offer rapid turnaround to consumers, which is a key factor in choosing where to buy online apparel. In many cases, retailers have asked us for assistance in identifying our local customers to help with their fulfillment.
With the acquisition of Custom Gateway, we expanded our customer base, which is now a part of our KornitX customer base, to include digitally native and traditional creators, licensors, retailers, e-tailers, and brands selling textile and hard good products and fulfilling them using on-demand business models, by leveraging the Custom Gateway network of fulfillers and suppliers.
The KornitX customer base includes:
Demand Generators. Driven by online presence but may also include brick-and-mortar presence, notably creators, licensors, retailers, e-tailers, merchandisers, and brands benefiting from KornitX ability to diversify their online and physical offering, enable virtual product display, personalized and customized offerings with rapid fulfilment capabilities.
Fulfillers and Suppliers. Utilizing KornitX platform to publish their own virtual product offerings, as well as fulfill and manufacture on-demand for demand generators. These customers include both textile and hard-good fulfillers.
See “ITEM 10. Additional Information- C. - Material Contracts - Agreements with Amazon.”
Government Regulation
We are subject to various local, state, federal and international laws, regulations, and agencies that affect businesses generally, and our business in particular. These include:
| ● | Israeli environmental, health and safety regulations, including conditions set by the Israeli Ministry of Environmental Protection for the operation of our manufacturing and development facilities which use chemicals and produce waste materials, as described below; | |
| ● | the U.S. Foreign Corrupt Practices Act; Anti-Money Laundering Act of 2020 |
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| ● | laws pertaining to the hiring, treatment, safety and discharge of employees; | |
| ● | import/ export control regulations related to chemicals and hazardous substances, as described below; | |
| ● | Israeli tax regulations, as described under “ITEM 5. Operating and Financial Review and Prospects— Taxation and Israeli Government Programs Applicable to Our Company” below; and | |
| ● | CE regulations for the European market. |
Israeli Environmental, Health and Safety Regulations. Our manufacturing and development facilities use chemicals and produce waste materials, which require us to hold business licenses that may include conditions set by the Israeli Ministry of Environmental Protection for the operations of such facilities. We are also subject to extensive environmental, health and safety laws and regulations governing, among other things, the use, storage, registration, handling and disposal of chemicals and waste materials, the presence of specified substances in electrical products, air, water and ground contamination, air emissions and the clean-up of contaminated sites. In the future we may incur expenditures of significant amounts in the event of non-compliance and/or remediation, whether fines or other civil, administrative or criminal sanctions, including the revocation of our toxin permit, business permits, or other permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury, including exposure to hazardous substances that we use, store, handle, transport, manufacture or dispose of, or property damage. Some environmental, health and safety laws and regulations allow for strict, joint and several liability for remediation costs, regardless of comparative fault. We may be identified as a potentially responsible party under such laws. In addition, our customers may need to obtain regulatory permits to operate our systems in their facilities.
Import/Export Control Regulation of Chemicals and Hazardous Substances. The export of our products internationally subjects us to environmental laws and regulations concerning the import and export of chemicals and hazardous substances. In the European marketplace, electrical and electronic equipment is required to comply with the Directive on Waste Electrical and Electronic Equipment, or WEEE, which aims to prevent waste by encouraging reuse and recycling, and the Directive on Restriction of Use of Certain Hazardous Substances, or RoHS, which restricts the use of ten hazardous substances in electrical and electronic products. Additionally, we are required to comply with certain laws, regulations and directives such as the United States Toxic Substances Control Act, or TSCA, and the Registration, Evaluation, Authorization and Restriction of Chemical Substances, or REACH. These laws and regulations require the testing and registration of some chemicals that we ship along with, or that form a part of, our systems and other products. If we fail to comply with these or similar laws and regulations, we may be required to make significant expenditures to reformulate the chemicals that we use in our products and materials or incur costs to register such chemicals to gain and/or regain compliance. Additionally, we could be subject to significant fines or other civil and criminal penalties should we not achieve such compliance.
| C. | Organizational Structure |
Our corporate structure consists of Kornit Digital Ltd., our Israeli parent company, and six wholly-owned subsidiaries: (1) Kornit Digital Technologies Ltd., which was incorporated on July 5, 2006 under the laws of the State of Israel, (2) Kornit Digital North America Inc., which was incorporated on September 12, 2007 under the laws of the State of Delaware, (3) Kornit Digital Europe GmbH, which was incorporated on April 20, 2011 under the laws of Germany, (4) Kornit Digital Asia Pacific Limited, which was incorporated on November 18, 2009 under the laws of Hong Kong, (5) Kornit Digital UK Ltd., which was incorporated on August 30, 2017 under the laws of England and Wales, and (6) Kornit Digital Japan KK which was incorporated on March 9, 2020 under the laws of Japan.
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Tesoma GmbH is wholly owned by Kornit Digital Technologies Ltd.
Custom Gateway, which currently operates under the name KornitX, was incorporated on May 5, 2010 under the laws of England and Wales, and is wholly owned by Kornit Digital UK Ltd. Custom Gateway Limited has several subsidiaries.
Kornit (Shanghai) Digital Co., Ltd., which was incorporated on December 8, 2021, is wholly owned by Kornit Digital Asia Pacific Limited.
| D. | Property, Plant and Equipment |
Our corporate headquarters are located in Rosh Ha’Ayin, Israel in an office and research and development facility consisting of approximately 173,503 square feet. The lease for this office expires in December 2025, with an option to extend the lease for an additional five years. We lease an additional facility of approximately 9,687 square feet near our corporate headquarters. The lease for this additional space expires in December 2025. In January 2022, we announced the official opening of a new, modern, ink manufacturing facility in Kiryat Gat. We own the property and the building at this facility (subject to a 49-year lease agreement with the ILA, which will renew for an additional 49 years). Our capital expenditures for 2020, 2021, and 2022 included approximately $2.5 million paid for the land for our new 6,400 square meter ink manufacturing and storage facility in Kiryat Gat, Israel. The total cost for land, construction of the facility, design, and installation of the production line, was approximately NIS 69 million (approximately $22 million). We used cash on hand to finance the construction of that facility.
Our U.S. headquarters are located in Englewood, New Jersey. We have entered into a lease for these headquarters, which includes approximately 15,845 square feet of offices and warehouse. The lease for this location expires in February 2028. We maintain additional sales, support and marketing offices in Dusseldorf, Hong Kong, United Kingdom, Massachusetts, Slovakia, and Japan. We also maintain a disaster recovery site in Milwaukee, Wisconsin, where we manufacture the fixation agent for some of our printers.
In November 2022, we entered into an agreement for the lease of an additional 18,256 square feet in our office in Dusseldorf, Germany, which we primarily intend to use as an experience center. The lease for this space will expire in 2028, with an option to extend the lease for two additional five-year periods.
ITEM 4A. Unresolved Staff Comments.
None.
ITEM 5. Operating and Financial Review and Prospects.
The information contained in this section should be read in conjunction with our financial statements for the year ended December 31, 2022 and related notes and the information contained elsewhere in this annual report. Our financial statements have been prepared in accordance with U.S. GAAP. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. As a result of many factors, such as those set forth under “ITEM 3.D. Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We develop, design and market innovative digital printing solutions for the global printed textile industry. Our vision is to revolutionize this industry by facilitating the transition from analog processes that have not evolved for decades to digital methods of production that address contemporary supply, demand, and environmental dynamics. We focus on the rapidly growing high throughput DTG and DTF segments of the printed textile industry. Our solutions include our proprietary digital printing systems, ink, and other consumables, associated software and value-added services that allow for printing large scale short runs of complex images and designs directly on finished garments and fabrics.
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We have developed and offer a broad portfolio of differentiated digital printing solutions for the DTG market that provide answers to challenges faced by participants in the global printed textile industry. Our DTG solutions utilize our patented wet-on-wet printing methodology, which eliminates the common practice of separately coating and drying textiles prior to printing. This methodology also enables printing on a wide range of untreated fabrics, including cotton, wool, polyester, lycra, and denim. Our patented NeoPigment ink, and other consumables, have been specially formulated to be compatible with our systems and overcome the quality-related challenges that pigment-based inks have traditionally faced when used in digital printing. Our software solutions simplify workflows in the printing process, by offering a complete solution from web order intake through graphic job preparation and execution.
Building on the expertise and capabilities that we have accumulated in developing and offering differentiated solutions for the industrial DTG market, we also offer an industrial digital printing solution, the Presto, which targets the on-demand DTF market. While the DTG market generally involves printing on finished garments, the DTF market is focused on printing on fabrics that are subsequently converted into finished garments, home or office décor, and other items. The Presto and Presto MAX, like our predecessor DTF product, the Allegro, utilize our proprietary wet-on-wet printing methodology and house an integrated drying and curing system. It offers the sole single-step, eco-friendly, stand-alone industrial DTF digital textile printing solution available on the market, following its predecessor the Allegro. We primarily sell the Presto to innovative web-based businesses operating on-demand models that require a high degree of variety and limited quantity orders, as well as to fabric converters, which source large quantities of fabric and convert the untreated fabrics into finished materials to be sold to garment and home décor manufacturers. We believe that with the Presto we are well positioned to take advantage of the growing trend towards customized fashion, home décor and on-demand fabric printing, where there is an increased focus on sustainable production. We began selling the Presto commercially in the second quarter of 2019, four years after having introduced our initial DTF digital textile printing solution, the Kornit Allegro in the second quarter of 2015.
Our go-to-market strategy consists of a hybrid model of indirect and direct sales, with a trend towards adopting a direct sales model in certain key markets, as we have done in North America. We have historically generated a significant portion of our sales through a global network of independent distributors and value-added resellers that we refer to as our channel partners. Our channel partners, in turn, sell the solutions they purchase from us to customers for whom we provide installation services, or sell and install our solutions on their own. Our channel partners work closely with our sales force and assist us by identifying potential sales targets, closing new business, and maintaining relationships with, and, in certain jurisdictions, providing support directly to our customers. Our agreement with our previous primary independent distributor in North America terminated effective as of February 7, 2019, following which we transitioned towards a direct sales model in that region.
Maintenance and support for our systems is performed either by our own service organization or by service engineers employed by our distributors. This varies among the four regions that we currently serve, depending on the infrastructure we have established in each particular region. We provide professional services directly to some of our customers in all regions. Our customers can renew maintenance and support contracts for additional periods by purchasing a maintenance and support package that covers remote support, software upgrades and onsite yearly maintenance or they can choose to rely on our support on a non-contractual time and material basis.
We have an attractive business model, with our growing installed base of systems driving recurring sales of ink and other consumables. Our ink and other consumables are specially formulated to enable our systems to operate at the highest throughput level while adhering to high print quality requirements.
We intend to capitalize on the continued growth of the DTG market by expanding our diverse global customer base, focusing particularly on fast-growing web-to-print businesses. We also seek to increase our sales to existing customers, particularly sales of our ink and other consumables. At the same time, we are pursuing new high-volume customers, including new customers in the screen replacement market, which should help drive an increase in the sale of ink and other consumables. We also expect to extend our serviceable addressable market by introducing new features and functionality that enhance the capabilities of our systems and inks, and enable our systems to print on new types of media. We plan to accomplish these goals by investing in our direct sales force, developing new applications for our systems, introducing new solutions, and growing our relationships with channel partners.
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| A. | Operating Results |
The information contained in this section should be read in conjunction with our audited financial statements for the years ended December 31, 2020, 2021 and 2022 and related notes and the information contained in “ITEM 18. Financial Statements”. Our financial statements have been prepared in accordance with US GAAP.
Components of Statement of Operations
Revenues
Systems, Ink and Other Consumables, Value Added Services
We generate revenues from the sale of our systems, ink and other consumables, and services, including software subscriptions and transaction-based revenues We target an equal mix of revenues from our systems compared with ink and other consumables, due to our growing installed base, which generates recurring revenues from ink and other consumables sales. We do not, however, consider period-to-period changes in our total installed base to be a helpful metric in assessing our performance because we sell a number of different systems that have significantly different throughput characteristics and average selling prices. Our installed base does not, therefore, serve to indicate revenues from future systems sales or expected consumables sales. Instead, because we have not experienced material changes in the prices at which we sell ink and other consumables, we believe the amount of the increase in revenues from ink and other consumables generated each period from our growing installed base is a key measure of success for our recurring revenues strategy.
We generate the services portion of our revenues from the provision of spare parts to our distributors and customers, system upgrades, post-warranty service contracts, time and material-based services, software subscriptions and transaction-based revenues.
We have historically sold our products directly and through independent distributors who resell them to customers. Sales by our distributors accounted for approximately 13% and 19% of our revenues during 2021 and 2022, respectively.
We recognize revenues in accordance with ASC No. 606, “Revenue from Contracts with Customers”. As such, we recognize revenue under the core principle that transfer of control to our customers should be depicted in an amount reflecting the consideration we expect to receive in revenue. Therefore, we identify a contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to each performance obligation in the contract and recognize revenues when, or as, we satisfy a performance obligation.
We periodically provide customer incentive programs, including product discounts, volume-based rebates, and warrants, which are accounted for as variable consideration that is deducted from revenue in the period in which the revenue is recognized. These reductions to revenue are made based upon reasonable and reliable estimates that are determined by historical experience and the specific terms and conditions of the incentive.
See “-Critical Accounting Policies-Revenue Recognition”.
Geographic Breakdown of Revenues
The following table sets forth the geographic breakdown of revenues from sales to customers located in the regions indicated below for the periods indicated:
| 2020 | 2021 | 2022 | ||||||||||||||||||||||
| $ | % | $ | % | $ | % | |||||||||||||||||||
| (in thousands except percentages) | ||||||||||||||||||||||||
| U.S. | $ | 124,375 | 64.3 | % | $ | 211,294 | 65.6 | % | $ | 138,515 | 51.0 | % | ||||||||||||
| EMEA | 45,859 | 23.7 | 78,686 | 24.4 | 93,243 | 34.3 | ||||||||||||||||||
| Asia Pacific | 14,211 | 7.4 | 23,341 | 7.2 | 24,396 | 9.0 | ||||||||||||||||||
| Other | 8,886 | 4.6 | 8,685 | 2.8 | 15,364 | 5.7 | ||||||||||||||||||
| Total revenues | $ | 193,331 | 100 | % | $ | 322,006 | 100 | % | $ | 271,518 | 100 | % | ||||||||||||
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Shipping and handling
Shipping and handling fees that are charged to our customers are recognized as revenue in the period shipped and the related costs for providing these services are recorded as a cost of revenues.
Cost of Revenues and Gross Profit
Cost of revenues consists primarily of payments to the third-party contract manufacturers who assemble our systems and who are responsible for ordering most of the components for those systems. Cost of revenues also includes components for our systems for which we are responsible, such as print heads, as well as raw materials for ink and other consumables. Cost of revenues includes personnel expenses, such as operation and supply chain employees, and related overhead for the manufacturing of our systems, as well as expenses for service personnel involved in the installation and support of our systems, shipping and handling fees, amortization of intangible assets, and overhead for the manufacturing process of ink and other consumables.
Gross profit is revenues less cost of revenues. Gross margin is gross profit expressed as a percentage of total revenues. Our gross margin has historically fluctuated from period to period as a result of changes in the mix of the systems that we sell and the amount of revenues that we derive from ink and other consumables versus systems. In general, we generate higher gross margins from our high throughput systems compared with entry level systems. In addition, customers that purchase our high throughput systems generally use larger quantities of ink and other consumables, which generate higher margins than sales of systems.
We currently provide maintenance and support for all our systems sold in the United States. We seek to increase the number of customers that rely on us to provide maintenance and support for their systems by expanding our maintenance and support capabilities. In addition to driving gross margin improvement, we believe this provides us with an opportunity to work directly with customers with the goal of reducing system down-time, educating customers on how to optimally use our systems to drive increased utilization and growth in impressions printed, expanding the variety of print applications, as well as increasing sales of post-warranty service contracts and other professional application development services. We are seeking to generate increased revenues from our services offering, including increasing sales of post-warranty service contracts, selling upgrade kits, and providing other professionally services, to leverage the fixed cost component associated with and increase the contribution margin.
Operating Expenses
Our operating expenses are classified into three categories: research and development expenses, net, sales and marketing expenses, and general and administrative expenses. For each category, the largest component is generally personnel costs, consisting of salaries and related personnel expenses, including share-based compensation expenses. Operating expenses also include allocated overhead costs for facilities, including rent payments under our facility leases. We expect personnel and allocated costs to continue to increase at a controlled pace as we hire new employees to support the growth of our business, but at a slower pace than in prior years. In the long term, we expect operating expenses to decrease as a percentage of revenues.
Research and Development Expenses, net. The largest component of our research and development expenses, net of government grants, is salaries and related personnel expenses for our research and development employees. Research and development expenses also include, purchases of laboratory supplies; expenses related to beta testing of our systems; amortization of intangible assets; and allocated overhead costs for facilities, including rent payments under our facilities leases. We record all research and development expenses as they are incurred, except for development expenses, which are capitalized in accordance with ASC 350-40. Our current research and development efforts are primarily focused on our next generation of DTF and DTG systems. We are also investing in the development of new ink formulas for our new systems, in order to expand the range of fabrics on which we can print and improve color quality and diversification of our high-resolution images and designs. We are improving our software solutions to simplify workflows in the printing process, by offering a complete solution from web order intake through graphic job preparation and execution.
Sales and Marketing Expenses. The largest component of our sales and marketing expenses is salaries and related personnel expenses for our marketing, sales and other sales-support employees. Sales and marketing expenses also include trade shows, other advertising and promotions, including distributor open houses and media advertising; sales-based commissions and allocated overhead costs for facilities, including rent payments under our facilities leases. We market our solutions using a combination of internal marketing professionals and our network of channel partners.
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General and Administrative Expenses. The largest component of our general and administrative expenses is salaries and related personnel expenses for our executive officers, financial staff, information technology staff, and human resources staff. General and administrative costs also include fees for accounting and legal services, insurance and costs for facilities, including rent payments under our facilities leases, partially allocated to other departments.
Finance Income, Net
Finance income, net consists of interest income and foreign currency exchange gains or losses. Foreign currency exchange changes reflect gains or losses related to changes in the value of our non-U.S. dollar denominated financial assets, primarily cash and cash equivalents, and trade payables and receivables. As of December 31, 2022, we did not have any indebtedness for borrowed amounts. Interest income consists of interest earned on our cash, cash equivalents, short-term bank deposits and marketable securities, offset by amortization of premium on marketable securities. We expect interest income to vary depending on our average investment balances and market interest rates during each reporting period.
Taxes on Income
The corporate tax rate in Israel has been 23% for 2018 and all subsequent years. However, as discussed in greater detail below under “Taxation and Israeli Government Programs Applicable To Our Company - Israeli Tax Considerations and Government Programs,” we and our wholly owned Israeli subsidiary, Kornit Digital Technologies Ltd., which we refer to as Kornit Technologies, are entitled to various tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959, or the Investment Law.
We consolidate the two separate results of our Israeli operations only for tax purposes such that net operating loss carryforwards of Kornit Technologies generated from 2014 onwards can be used to offset our taxable income. Kornit Technologies currently has enough carryforward net operating losses to offset our taxable income.
Beginning in January 2019, and with respect to its taxable results from 2019 onwards, our Israeli subsidiary further elected to apply the terms of the Investments Law as per its “Preferred Technological Enterprise,” or PTE, status. In each of 2020, 2021, and 2022, our effective tax rate was the blended rate of our Israeli tax and those of our non-Israeli subsidiaries in their respective jurisdictions of organization.
Comparison of Period-to-Period Results of Operations
We provide in this section data, as well as discussion and analysis, with respect to our results of operations for the last two years. While our statements of operations in Item 18 of this annual report cover each of the three years ended December 31, 2020, 2021, and 2022, the data, and discussion and analysis, in this Item 5.A do not address the year ended December 31, 2020, or a comparison of that year to the year ended December 31, 2021. In order to view that data, and discussion and analysis, please see “ITEM 5. Operating and Financial Review and Prospects - A. Operating Results - Comparison of Period-to-Period Results of Operations - Comparison of the Years Ended December 31, 2020 and 2021” in our Annual Report on Form 20-F for the year ended December 31, 2021, which we filed with the SEC on March 30, 2022.
Comparison of the Years Ended December 31, 2022 and 2021
The following tables present a comparison of the various components of our results of operations for the years ended December 31, 2022 and 2021, both in absolute amounts and as a percentage of our revenues in those respective years.
| Year Ended December 31, | ||||||||
| 2021 | 2022 | |||||||
| (in thousands) | ||||||||
| Revenues | ||||||||
| Products | $ | 282,637 | $ | 222,502 | ||||
| Services | 39,369 | 49,016 | ||||||
| Total revenues | 322,006 | 271,518 | ||||||
| Cost of revenues | ||||||||
| Products | 132,730 | 125,935 | ||||||
| Services | 37,365 | 49,083 | ||||||
| Total cost of revenues | 170,095 | 175,018 | ||||||
| Gross profit | 151,911 | 96,500 | ||||||
| Operating expenses: | ||||||||
| Research and development, net | 43,729 | 56,026 | ||||||
| Sales and marketing | 58,752 | 71,067 | ||||||
| General and administrative | 36,637 | 39,289 | ||||||
| Total operating expenses | 139,118 | 166,382 | ||||||
| Operating income (loss) | 12,793 | (69,882 | ) | |||||
| Finance income, net | 2,599 | 13,382 | ||||||
| Income (loss) before taxes on income (tax benefit) | 15,392 | (56,500 | ) | |||||
| Taxes on income (tax benefit) | (135 | ) | 22,565 | |||||
| Net income (loss) | $ | 15,527 | $ | (79,065 | ) | |||
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| Year Ended December 31, | ||||||||
| 2021 | 2022 | |||||||
| (as a % of revenues) | ||||||||
| Revenues | ||||||||
| Products | 87.8 | % | 81.9 | % | ||||
| Services | 12.2 | 18.1 | ||||||
| Total revenues | 100 | 100 | ||||||
| Cost of revenues | ||||||||
| Products | 41.2 | 46.4 | ||||||
| Services | 11.6 | 18.1 | ||||||
| Total cost of revenues | 52.8 | 64.5 | ||||||
| Gross profit | 47.2 | 35.5 | ||||||
| Operating expenses: | ||||||||
| Research and development, net | 13.6 | 20.6 | ||||||
| Sales and marketing | 18.2 | 26.2 | ||||||
| General and administrative | 11.4 | 14.5 | ||||||
| Total operating expenses | 43.2 | 61.3 | ||||||
| Operating income (loss) | 4.0 | (25.8 | ) | |||||
| Finance income, net | 0.8 | 5.0 | ||||||
| Income (loss) before taxes on income (tax benefit) | 4.8 | (20.8 | ) | |||||
| Taxes on income (tax benefit) | (0.04 | ) | 8.3 | |||||
| Net income (loss) | 4.8 | % | (29.1 | )% | ||||
Revenues
Revenues decreased by $50.5 million, or 15.7%, to $271.5 million in 2022 from $322.0 million in 2021, which is net of $25.4 million and $22.5 million, in 2021 and 2022, respectively, in fair value of the warrants associated with revenues recognized from Amazon. The decline in revenues was primarily driven by a 34.4% decrease in systems revenues to $119.1 in 2022 from $181.4 million in 2021, offset in part by (i) a 2.2% increase in ink and other consumables revenues to $103.4 million in 2022 from $101.2 million in 2021 and (ii) a 24.5% increase in service revenues to $49.0 million in 2022 from $39.4 million in 2021. The $62.3 million decrease in systems revenues was attributable to macro-related headwinds and other pressures, which continue to impact customers’ systems purchasing decisions. The $2.2 million increase in ink and other consumables revenues was due to a larger installed base, partially offset by a transition in our installed base to HD technology, which consumes a lower amount of ink and other consumables on a relative basis. The increase in our service revenues was due mainly to (i) sales of spare parts and service contracts on a larger installed base, as well as an increase in systems upgrades and (ii) service revenues associated with the Tesoma acquisition.
Cost of Revenues and Gross Profit
Cost of revenues increased by $4.9 million, or 2.9%, to $175.0 million in 2022 from $170.1 million in 2021. Gross profit decreased by $55.4 million, or 36.5%, to $96.5 million in 2022 from $151.9 million in 2021. Gross margin decreased to 35.5% in 2022 compared with 47.2% in 2021. The reduced gross profit and gross margin reflect significantly lower year-over-year systems revenues, particularly when compared with our fixed costs and infrastructure, which are designed to be profitable at a materially higher revenue run rate, as well as the higher inventory write-offs in 2022 compared with 2021.
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Operating Expenses
| Year Ended December 31, | ||||||||||||||||||||||||
| 2021 | 2022 | Change | ||||||||||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | Amount | % | |||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Research and development, net | $ | 43,729 | 13.6 | % | $ | 56,026 | 20.6 | % | $ | 12,297 | 28.1 | % | ||||||||||||
| Sales and marketing | 58,752 | 18.2 | 71,067 | 26.2 | 12,315 | 21.0 | ||||||||||||||||||
| General and administrative | 36,637 | 11.4 | 39,289 | 14.5 | 2,652 | 7.2 | ||||||||||||||||||
| Total operating expenses | $ | 139,118 | 43.2 | % | $ | 166,382 | 61.3 | % | $ | 27,264 | 19.6 | % | ||||||||||||
Research and Development, net. Research and development, or R&D, expenses, net of government grants, increased by 28.1% in 2022 compared with 2021. This primarily reflects our continued investment in innovation and new products. The increased net R&D expenses mainly related to personnel expenses and share-based compensation due to an increase in the number of employees, with higher seniority and variable compensation payout, compared with 2021. As a percentage of total revenues, our R&D expenses increased to 20.6% in 2022 from 13.6% in 2021.
Sales and Marketing. Sales and marketing expenses increased by 21.0% in 2022 compared with 2021. This increase was due primarily to our continued efforts and investment to enhance our go-to-market, or GTM strategy, as well as various marketing projects, activities, and events with customers. As a percentage of total revenues, our sales and marketing expenses increased to 26.2% in 2022 from 18.2% in 2021.
General and Administrative. General and administrative expenses increased by 7.2% in 2022 compared with 2021. This was primarily due to an increase in share-based compensation expenses, additional expenses from the Tesoma acquisition, as well as additional personnel. As a percentage of total revenues, our general and administrative expenses increased to 14.5% in 2022 from 11.4% in 2021.
Finance Income, Net
Finance income, net, totaled $13.4 million in 2022 compared with $2.6 million in 2021. The $10.8 million increase was due primarily to interest income on bank deposits and interest income on marketable securities.
Taxes on Income
Taxes on income amounted to $22.6 million in 2022, compared with $0.1 million in 2021. The change was due mainly to (i) the payment of approximately $11.5 million to the Israeli Tax Authority for trapped profits from prior years at a steeply discounted rate, and (ii) the valuation allowance recorded against deferred tax assets. In assessing the ability to realize deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the available evidence, we believe that it is more likely than not that the deferred tax assets will not be realized and, accordingly, a valuation allowance has been provided. For more information, please see Note 14(h) to our consolidated financial statements that appear in Item 18 of this Annual Report.
For more information concerning our income tax expenses, please see the risk factor in Item 3.D above that begins “We may be subject to additional tax liabilities in the future as a result of audits of our tax returns.”
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Taxation and Israeli Government Programs Applicable to Our Company
Israeli Tax Considerations and Government Programs
The following is a brief summary of the material Israeli tax laws applicable to us, and certain Israeli Government programs that benefit us.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax on their taxable income. Since 2018, the corporate tax rate has been 23%. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Benefited Enterprise, a Preferred Enterprise, a Special Preferred Enterprise, a Preferred Technology Enterprise or Special Preferred Technology Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli company are generally subject to the prevailing corporate tax rate.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for “Industrial Companies”. The Israeli companies are an “Industrial Company” as defined by the Israeli Law for the Encouragement of Industry (Taxation), 1969.
The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, which was incorporated in Israel and of which 90% or more of its income in any tax year, other than income from certain government loans, is derived from an “Industrial Enterprise” located in Israel or in the “Area”, in accordance with the definition under section 3A of the Israeli Income Tax Ordinance (New Version) 1961, or the Ordinance, and owned by it. An “Industrial Enterprise” is defined as an enterprise which is held by an Industrial Company whose principal activity in any given tax year is industrial production.
The following tax benefits, among others, are available to Industrial Companies:
| ● | amortization of the cost of purchased know-how, patents and rights to use a patent or know-how that were purchased in good faith and are used for the development or promotion of the Industrial Enterprise, over an eight-year period commencing on the year in which such rights were first exercised; | |
| ● | under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies controlled by it; and |
| ● | expenses related to a public offering are deductible in equal amounts over three years, commencing in the year of the offering. |
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
There can be no assurance that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
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Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives for capital investments in production facilities (or other eligible assets) by “Industrial Enterprises” (as defined under the Investment Law).
The Investment Law has been amended several times over the recent years, with the three most significant changes effective as of April 1, 2005, or the 2005 Amendment, as of January 1, 2011, or the 2011 Amendment and as of January 1, 2017, or the 2017 Amendment. Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the 2005 Amendment. Similarly, the 2011 Amendment introduced new benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect prior to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and have the benefits of the 2011 Amendment apply. We have examined the possible effect of these provisions of the 2011 Amendment on our financial statements and have decided not to opt to apply the new benefits under the 2011 Amendment and the 2017 Amendment for our company, and for our Israeli subsidiary we elected to apply the benefit under the 2011 Amendment. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside the existing tax benefits.
The following discussion is a summary of the Investment Law following its most recent amendments:
Tax Benefits Subsequent to the 2005 Amendment
The 2005 Amendment applies to new investment programs and investment programs commencing after 2004, but does not apply to investment programs approved prior to April 1, 2005, referred to as Approved Enterprises. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval. Pursuant to the 2005 Amendment, the Israeli Authority for Investments and Development of the Industry and Economy, or the Investment Center, will continue to grant Approved Enterprise status to qualifying investments. The 2005 Amendment, however, limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise.
The 2005 Amendment provides that Approved Enterprise status will only be necessary for receiving cash grants. As a result, it was no longer necessary for a company to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternative benefits track. Instead, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. Companies or programs under the new provisions receiving these tax benefits are referred to as Benefited Enterprises. A company that has a Benefited Enterprise may, at its discretion, approach the Israel Tax
Authority for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law, as amended.
Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities) which are generally required to derive 25% or more of their business income from export to specific markets with a population of at least 14 million in 2012 (such export criteria will further be increased in the future by 1.4% per annum). In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets certain conditions set forth in the amendment for tax benefits, including exceeding a minimum investment amount specified in the Investment Law. Such investment entitles a company to receive a “Benefited Enterprise” status with respect to the investment, and may be made over a period of no more than three years ending in the year in which the company requested to have the tax benefits apply to its Benefited Enterprise. Where a company requests to have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered to be a Benefited Enterprise and the company’s effective tax rate will be the weighted average of the applicable rates. In such case, the minimum investment required in order to qualify as a Benefited Enterprise must exceed a certain percentage of the value of the company’s production assets before the expansion.
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise depends on, among other things, the geographic location within Israel of the Benefited Enterprise. The location will also determine the period for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year. The benefits period is limited to 12 years from the year the company first chose to have the tax benefits apply.
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A company qualifying for tax benefits under the 2005 Amendment which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject to deferred corporate tax in respect of the gross amount of the dividend distributed (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable. Dividends paid to Israeli shareholders out of income attributed to a Benefited Enterprise (or out of dividends received from a company whose income is attributed to a Benefited Enterprise) are generally subject to withholding tax at source at the rate of 15% (in the case of non-Israeli shareholders - subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, 15%, or such lower rate as may be provided in an applicable tax treaty). The reduced rate of 15% is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 30%, or at a lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). In the case of a Foreign Investors’ Company (as such term is defined in the Investment Law), the 12-year limitation on reduced withholding tax on dividends does not apply.
During the years 2010 to 2019, we were entitled to a tax exemption for undistributed income (“Trapped Profits”) and a reduced tax rate under the Benefited Enterprise programs under the Investment Law. Our company enjoyed these tax benefits until 2019. On November 15, 2021, a new amendment of the Investment Law was enacted harshening the rules with respect to determining the profits from which a dividend was distributed and providing that part of any dividend distribution will be deemed as distributed from the Trapped Profits, according to a certain formula. The Israeli government agreed to grant a relief of 30%-60% on the amount of tax which should have been paid on distributable earnings in order to encourage companies to pay the reduced taxes during the next 12 months (the “Temporary Order”). In November 2022, we applied the Temporary Order to our exempt profits accrued prior to 2022.
Tax Benefits under the 2011 Amendment
The 2011 Amendment canceled the availability of the benefits granted to companies in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011. The definition of a Preferred Company includes an industrial company that was incorporated in Israel, which is not wholly owned by a governmental entity, and which has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate flat tax rate of 15% with respect to its preferred income derived by its Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise is located in a certain development zone, in which case the rate will be 10%. Such corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013 and increased to 16% and 9%, respectively, in 2014 and through 2016. Pursuant to the 2017 Amendment, in 2017 and thereafter, the corporate tax rate for a Preferred Enterprise which is located in a specified development zone was decreased to 7.5%, while the reduced corporate tax rate for other development zones remains 16%. Income derived by a Preferred Company from a ‘Special Preferred Enterprise’ (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or to 5% if the Special Preferred Enterprise is located in a certain development zone. As of January 1, 2017, the definition of “Special Preferred Enterprise” includes less stringent conditions.
The tax benefits under the 2011 Amendment also include accelerated depreciation and amortization for tax purposes.
Dividends paid to Israeli shareholders out of preferred income attributed to a Preferred Enterprise or to a Special Preferred Enterprise are generally subject to withholding tax at source at the rate of 20% (in the case of non-Israeli shareholders - subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, 20% or such lower rate as may be provided in an applicable tax treaty). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if subsequently distributed to individuals or a non-Israeli company, withholding of 20% or such lower rate as may be provided in an applicable tax treaty will apply).
The 2011 Amendment also provided transitional provisions to address companies already enjoying existing tax benefits under the Investment Law. These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise which chose to receive grants and certain tax benefits before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; (ii) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise which had participated in an alternative benefits track before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a Benefited Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met. Kornit Technologies has filed a notification that it wishes to apply the new benefits under the 2011 Amendment.
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New Tax benefits under the 2017 Amendment that became effective on January 1, 2017.
The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a Preferred Technology Enterprise and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development zone “A”. These corporate tax rates shall apply only with respect to the portion of the Preferred Technology Income derived from R&D developed in Israel. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted Intangible Assets were acquired from a foreign company after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the National Authority for Technological Innovation (previously known as the Israeli Office of the Chief Scientist), referred to as the Israel Innovation Authority (“IIA”) .
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by the Special Preferred Technology Enterprise or acquired from a foreign company after January 1, 2017, and the sale received prior approval from the IIA. A Special Preferred Technology Enterprise that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed to Israeli shareholders by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source at the rate of 20% (in the case of non-Israeli shareholders - subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, 20% or such lower rate as may be provided in an applicable tax treaty). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed from such Israeli company to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). If such dividends are distributed to a foreign parent company holding, solely or together with another foreign company, at least 90% of the shares of the distributing company and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).
We believe that we and our Israeli subsidiary meet the conditions for “Preferred Technological Enterprises”, and accordingly are eligible for the tax rate of 12% on income that qualifies as “Preferred Technology Income”, as defined in the Law. The tax rate for Preferred Technological Enterprises located in development zone A is 7.5%.
From time to time, the Israeli Government has discussed reducing the benefits available to companies under the Investment Law. The termination or substantial reduction of any of the benefits available under the Investment Law could materially increase our tax liabilities.
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| B. | Liquidity and Capital Resources |
As of December 31, 2022, we had $104.6 million in cash and cash equivalents, $275.0 million in short term deposits and $266.4 million in marketable securities, which, in the aggregate, total $646.0 million. We fund our operations with cash generated from operating activities and cash raised via our equity financings.
Our cash requirements have principally been for working capital, capital expenditures and acquisitions. Our working capital requirements reflect the growth in our business. Historically, we have funded our working capital requirements, primarily for inventory and accounts receivable, and capital expenditures from cash flows provided by our operating activities, investments in our equity securities and cash and cash equivalents on hand. We have funded our acquisitions from the proceeds of our April 2015 initial public offering and cash on hand. In 2022, our capital expenditures primarily related to Tesoma acquisition and leasehold improvements, whereas in 2021, our capital expenditures primarily related to the completion of construction of our manufacturing facility for our ink and other consumables in Kiryat Gat, Israel. In addition to investments in this facility, our capital investments have included improvements and expansion of our worldwide locations and corporate facilities to support our growth and investment and improvements in our information technology.
In 2021 and 2022, we acquired Voxel8 and Tesoma for cash consideration of $15.0 million and $15.4 million Euros, respectively. We will continue to actively seek strategic acquisitions that may require investments of cash. We believe that our current cash reserves will suffice for any such acquisitions, although there can be no assurance that we will not need to seek additional equity or debt financing in order to cover the cost of such potential acquisitions.
The most significant elements of our working capital requirements are for inventory, accounts receivable and trade payables. We partially fund the procurement of the components of our systems that are assembled by our third-party manufacturers. Our inventory strategy includes maintaining inventory of systems and inks and other consumables at levels that we expect to sell during the successive three-month period based on anticipated customer demand. Our accounts receivable increased in 2022 primarily due to selectively extending payment terms to qualified customers. Our trade payables decreased in 2022 mainly due to lower materials purchases associated with reduced systems sales throughout the year, as well as payments made in advance of cutting over to a new ERP system, which we successfully transitioned to in January 2023.
As of December 31, 2022, we had a line of credit with an Israeli bank for total borrowings of up to 6 million NIS, all of which was undrawn as of that date. This line of credit is unsecured and available subject to: (i) our maintenance of a 30% ratio of total tangible shareholders’ equity to total tangible assets; and (ii) the total credit use must be less than 70% of our and our subsidiaries’ receivables. Interest rates across this credit line varies from 0.3% to 5.45% as of December 31, 2022.
Based on our current business plans, we believe that our cash flows from operating activities and our existing cash resources will be sufficient to fund our projected cash requirements for at least the next 12 months without drawing on our lines of credit or using significant amounts of the net proceeds from our initial public offering or our follow-on offerings. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support product development efforts, the expansion of our sales and marketing activities, the timing of introductions of new solutions and the continuing market acceptance of our solutions, as well as other business development efforts.
We provide below a summary of our consolidated statement of cash flows for the last two years. While our statements of cash flows in Item 18 of this annual report include cash flow data for each of the three years ended December 31, 2020, 2021, and 2022, the data and discussion contained in this Item 5.B is limited to a comparison of our liquidity and capital resources- including cash flows- for the years ended December 31, 2022 and 2021. For a discussion of our cash flows for the year ended December 31, 2020, and a comparison of those cash flows with those for the year ended December 31, 2021, please see “Item 5. Operating and Financial Review and Prospects-B. Liquidity and Capital Resources” in our Annual Report on Form 20-F for the year ended December 31, 2021, which we filed with the SEC on March 30, 2022.
The following table presents the major components of net cash flows for our last two fiscal years:
| Year Ended December 31, | ||||||||
| 2021 | 2022 | |||||||
| (in thousands) | ||||||||
| Net cash provided by (used in) operating activities | $ | 53,644 | $ | (99,347 | ) | |||
| Net cash provided by (used in) investing activities | 89,755 | (407,275 | ) | |||||
| Net cash provided by (used in) financing activities | 342,375 | (332 | ) | |||||
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Net Cash Provided by (Used in) Operating Activities
Year Ended December 31, 2022
Net cash used in operating activities in the year ended December 31, 2022 was $99.3 million.
Net cash used in operating activities in 2022 reflects a net loss of $79.1 million and the elimination of non-cash expense line items, such as share-based compensation expenses of $22.6 million, the fair value of warrants deducted from revenues of $22.5 million, and depreciation and amortization of $13.6 million. These adjustments were offset by the elimination of certain non-cash changes to our operating assets and liabilities, which, when eliminated, had a net impact of increasing the cash used in our operating activities, including an increase of accounts receivables of $15.9 million, an increase of inventory of $29.0 million and a decrease in trade payables of $26.9 million.
The increase in accounts receivables reflects a higher portion of receivables with extended payment terms, with DSO increasing to 91 days for the year ended December 31, 2022, compared with 56 days for the year ended December 31, 2021.
The increase in inventory was due primarily to higher levels of systems inventory, print heads and the Tesoma acquisition.
The decrease in trade payables was due to lower materials purchases associated with reduced systems sales throughout the year, as well as payments made in advance of cutting over to a new ERP system, which we successfully transitioned to in January 2023.
Year Ended December 31, 2021
Net cash provided by operating activities in the year ended December 31, 2021 was $53.6 million.
Net cash provided by operating activities in 2021 reflect a net income of $15.5 million and the elimination of non-cash expense line items, such as share-based compensation expenses of $15.1 million, the fair value of warrants deducted from revenues of $25.4 million, and depreciation and amortization of $7.1 million. These adjustments were offset in part by the elimination of certain non-cash changes to our operating assets and liabilities, which, when eliminated, had a net impact of reducing the cash provided by our operating activities, including a decrease in deferred revenues and advances from customers of $21.7 million and an increase in other accounts receivables and prepaid expenses of $4.1 million.
During 2021, our accounts receivable decreased by $1.8 million. DSO for the year ended December 31, 2021 decreased to 56 days compared with 98 days for the year ended December 31, 2020. While our revenues increased significantly in the year ended December 31, 2021, we maintained a relatively similar level of accounts receivable, which resulted in a significant decrease in DSO; that reflects strong collection on our part of obligations from our customers.
During 2021, our inventory increased by a net amount of $10.5 million compared with the year ended December 31, 2020. $14.1 million of inventory was attributed to cash operating activities in the year ended December 31, 2021. The increase in inventory levels in 2021 was primarily due to the cost of deferred systems and the need to maintain higher levels of inventory to support our increased install base and future business activities.
During 2021, trade payables increased $12.9, in line with the growth in our sales and operations for the year.
Net Cash Provided by (Used in) Investing Activities
Net cash used in investing activities in the year ended December 31, 2022, was $407.3 million. Net cash used in investing activities for the year ended December 31, 2022, was primarily attributable to investments in marketable securities and bank deposits of $403.4 million, purchase of property, plant and equipment of $18.0 million, and $14.7 million of cash paid in connection with acquisitions, offset, in part, by $29.8 million of proceeds from the sale and maturity of marketable securities.
Net cash provided by investing activities was $89.8 million for the year ended December 31, 2021, which was primarily attributable to net proceeds from short-term bank deposits of $215.6 million and $14.5 million of proceeds from the sale and maturity of marketable securities, offset in part by investments in marketable securities of $110.5 million, the purchase of property, plant and equipment of $14.5 million, and $15.0 million of cash paid in connection with acquisitions.
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Net Cash Provided by (Used in) Financing Activities
Net cash used in financing activities was $0.3 million for the year ended December 31, 2022, which was primarily attributable to payments related to shares withheld for taxes, offset, in part, by proceeds from exercise of employee stock options.
Net cash provided by financing activities was $342.4 million for the year ended December 31, 2021, which was primarily attributable to our follow-on offering in November 2021, in which we raised $339.8 million of net proceeds.
| C. | Research and development, patents and licenses, etc. |
For a description of our research and development programs and the amounts that we have incurred over the last three years pursuant to those programs, please see “ITEM 5. Operating and Financial Review and Prospects- A. Operating Results- Components of Statement of Operations- Operating Expenses- Research and Development Expenses, net” and “ITEM 5. Operating and Financial Review and Prospects- A. Operating Results- Comparison of Period to Period Results of Operations- Comparison of the Years Ended December 31, 2021 and 2022- Operating Expenses- Research and Development, net” and the corresponding portions of our Annual Report on Form 20-F for the year ended December 31, 2021, which we filed with the SEC on March 30, 2022.
| D. | Trend Information |
Our results of operations and financial condition may be affected by various trends and factors discussed in “ITEM 3.D Risk Factors,” including “If the market for digital textile printing does not develop as we anticipate, our sales may not grow as quickly as expected and our share price could decline”, and “Macro-economic headwinds caused by inflation, rising interest rates and global supply problems have been adversely impacting our revenues, profitability and cash flows, and may continue to do so”, and in “ITEM 4.B Business Overview-Industry Overview.” Additional trends that could potentially impact our results of operations and financial condition include changes in political, military or economic conditions in Israel and in the Middle East, and any potential cyber attack on our IT systems, which we believe could have a material effect on our results of operations, liquidity, or financial condition or could cause our reported financial information not to be necessarily indicative of future operating results or financial condition.
| E. | Critical Accounting Estimates |
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). These accounting principles are more fully described in Note 2 to our consolidated financial statements included elsewhere in this annual report and require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. We believe that the accounting policies discussed below are critical to our financial results and to the understanding of our past and future performance, as these policies relate to the more significant areas involving management’s estimates and assumptions. We consider an accounting estimate to be critical if: (1) it requires us to make assumptions because information was not available at the time, or it included matters that were highly uncertain at the time we were making our estimate; and (2) changes in the estimate could have a material impact on our financial condition or results of operations.
We believe that the following significant accounting policies are the basis for the most significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We generate revenues from sales of systems, consumables and services. We generate revenues from sale of our products directly to end-users and indirectly through independent distributors, all of whom are considered end-users. We recognize revenue under the core principle that transfer of control to our customers should be depicted in an amount reflecting the consideration we expect to receive in revenue. Therefore, we identify a contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to each performance obligation in the contract, and recognize revenues when, or as, we satisfy a performance obligation.
Revenues from products, which consist of systems and consumables, are recognized at the point in time when control has transferred, in accordance with the agreed-upon delivery terms.
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Revenues from services are derived mainly from the sale of print heads, spare parts, upgrade kits, software subscription and service contracts. Our print heads, spare parts and upgrade kits revenues (collectively “Spare parts”) are recognized at the point in time when control has transferred, in accordance with the agreed-upon delivery terms. Service contracts and software subscriptions are recognized over time, on a straight-line basis, over the period of the service.
For multiple performance obligations arrangements, such as selling a system with a service contract, installation and training, we account for each performance obligation separately, as it is distinct. The transaction price is allocated to each distinct performance obligation on a relative stand-alone selling price, or SSP, basis, and revenue is recognized for each performance obligation when control has passed, or service has been rendered. In most cases, we are able to establish SSP based on the observable prices of services sold separately in comparable circumstances to similar customers and for products based on our best estimates of the price at which we would have sold the product regularly on a stand-alone basis. We reassess the SSP on a periodic basis or when facts and circumstances change.
We do not account for training and installation as a separate performance obligation due to its immateriality in the context of our contracts. Accordingly, revenues from training and installation are recognized upon the delivery of our systems.
We periodically provide customer incentive programs in the form of product discounts, volume-based rebates and warrants, which are accounted for as variable consideration that are deducted from revenue in the period in which the revenue is recognized. These reductions to revenue are made based upon reasonable and reliable estimates that are determined according to historical experience and the specific terms and conditions of the incentive.
In cases in which old systems are traded in as part of sales of new systems, the fair value of the old systems is recorded as inventory, provided that such value can be recoverable.
Inventories
Inventories are measured at the lower of cost or net realizable value. Cost is computed using weighted average cost, on a first-in, first-out basis. Inventory costs consist of material, direct labor and overhead. We periodically assess inventory for obsolescence and excess and reduce the carrying value by an amount equal to the difference between its cost and the estimated net realizable value based on assumptions about future demand and historical sales patterns. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales and expected recoverable values of each disposition category. These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.
As of December 31, 2022, we had $89.4 million of inventory, of which $47.7 million consisted of raw materials and components and $41.7 million consisted of completed systems, ink and other consumables. We recorded inventory write-offs in total amounts of $5.0 million, $4.9 million, and $11.4 million for the years ended December 31, 2020, 2021, and 2022, respectively.
Share-Based Compensation
Under U.S. GAAP, we account for share-based compensation for employees in accordance with the provisions of the FASB’s ASC Topic 718 “Compensation - Stock Based Compensation,” or ASC 718, which requires us to measure the cost of options and RSUs based on the fair value of the award on the grant date.
The fair value of each RSU is the market value as determined by the closing share price at the date of the grant.
We selected the binomial option pricing model as the most appropriate method for determining the estimated fair value of options which requires the use of subjective assumptions, including the expected term of the award and the expected volatility of the price of our common stock. We recognize compensation expense over the vesting period using the straight-line method and classify these amounts in the consolidated financial statements based on the department to which the related employee reports. We will continue to use judgment in evaluating the assumptions related to our share-based compensation expense on a prospective basis. As we continue to accumulate additional data, we may have refinements to our estimates, which could materially impact our future share-based compensation expense.
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Taxes
We are subject to income taxes in Israel, United States Germany, Japan, United Kingdom and Hong Kong. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We recognize income taxes under the liability method. Tax benefits are recognized from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves when facts and circumstances change, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effects of any reserves that are considered appropriate, as well as the related net interest and penalties.
We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under U.S. GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. To make this judgment, we must make predictions of the amount and category of taxable income from various sources and weigh all available positive and negative evidence about these possible sources of taxable income.
While we believe the resulting tax balances as of December 31, 2020, 2021, 2022 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. We have filed or are in the process of filing local and foreign tax returns that may be audited by the respective tax authorities. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statute of limitations on potential assessments expire.
Warranty costs
We typically granted a six-month warranty on our systems and recorded a provision for warranty at the time at which a product’s revenue was recognized. We estimate the liability of possible warranty claims based on our historical experience. We estimate the costs that may be incurred under our warranty arrangements and record a liability in the amount of such costs at the time product revenue is recognized. We periodically assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
Marketable Securities
Marketable securities currently are comprised of debt securities. We determine the appropriate classification of marketable securities at the time of purchase and re-evaluate such designation at each balance sheet date. In accordance with FASB ASC No. 320, “Investment Debt Securities,” we classify marketable securities as available-for-sale. Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of shareholders’ equity, net of taxes. Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in finance income, net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in finance income, net. We classify our marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date and our expectations as to sales and redemptions in the following year.
During the years ended December 31, 2022, and 2021, no impairment was recorded related to our marketable securities.
Business Combination
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair value. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require our management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired technology and other intangible assets, their useful lives and discount rates. Our management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Recently Issued and Adopted Accounting Pronouncements
For a summary of recent accounting pronouncements applicable to our consolidated financial statements see Note 2, “Significant Accounting Policies” to the Consolidated Financial Statements included in Part III, Item 18 of this Annual Report on Form 20-F.
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ITEM 6. Directors, Senior Management and Employees.
| A. | Directors and Senior Management |
The following table sets forth the name, age and position of each of our executive officers and directors as of the date of this annual report:
| Name | Age | Position | ||
| Executive Officers | ||||
| Ronen Samuel | 54 | Chief Executive Officer and Director | ||
| Lauri Hanover | 63 | Chief Financial Officer and Director | ||
| Jecka Glasman | 55 | Chief Commercial Officer | ||
| Daniel Gazit | 51 | Chief Product Officer | ||
| Kobi Mann | 43 | Chief Technology Officer | ||
| Directors (who are not also executive officers) | ||||
| Yuval Cohen(3) | 60 | Chairman of the Board of Directors | ||
| Ofer Ben-Zur(3) | 58 | Director | ||
| Jae Hyun (Jay) Lee(3) | 58 | Director | ||
| Stephen Nigro(2)(3) | 63 | Director | ||
| Yehoshua (Shuki) Nir (1)(2)(3) | 53 | Director | ||
| Dov Ofer(1)(2)(3) | 69 | Director | ||
| Gabi Seligsohn(1)(3) | 56 | Director | ||
| (1) | Member of our audit committee. |
| (2) | Member of our compensation committee. |
| (3) | Independent director under the Nasdaq Stock Market rules. |
Executive Officers
Ronen Samuel has served as our Chief Executive Officer since August 2018 and as a director since August 2019. Prior to joining our company, Mr. Samuel served in various capacities at Hewlett -Packard, or HP, over the course of the previous 18 years. Most recently, he served as Vice President and General Manager of HP Indigo and WebPress EMEA. Prior to that, Mr. Samuel led HP’s Asia Pacific and Japan region for seven years. He was also engaged in Strategic Marketing while at HP, working closely with Research and Development to define future products. While at HP, Mr. Samuel also served in various capacities as product/project manager. Prior to his career in printing technology, Mr. Samuel spent seven years in the Israeli Air Force, rising to the rank of major while serving as a fighter pilot and leading the establishment of Israel’s second Apache Squadron. Mr. Samuel received an M.B.A. from Northwestern University’s Kellogg School of Management and received an undergraduate Business and Law degree from The Interdisciplinary Center in Herzliya, Israel.
Lauri Hanover has served as our Chief Financial Officer since November 2022 and as a director since March 2015 (until August 2019, as an external director under the Companies Law). From April 2021 to November 2022, Ms. Hanover served as Senior Vice President, Community Agriculture and prior to that served as Senior Vice President and Chief Financial Officer of Netafim Ltd., a global leader in smart irrigation systems, since August 2013. From 2009 to 2013, she served as Chief Financial Officer and Executive Vice President of the Tnuva Group, Israel’s largest food manufacturer. From 2008 to 2009, Ms. Hanover served as Chief Executive Officer of Gross, Kleinhendler, Hodak, Halevy and Greenberg & Co., an Israeli law firm. From 2004 to 2007, she served as Chief Financial Officer and Senior Vice President of Lumenis Ltd. (Nasdaq: LMNS), a medical laser device company. From 2000 to 2004, Ms. Hanover served as the Chief Financial Officer and Corporate Vice President of NICE Systems Ltd. (Nasdaq: NICE), an interaction analytics company, and from 1997 to 2000, as Chief Financial Officer and Executive Vice President of Sapiens International Corporation N.V. (Nasdaq: SPNS), a provider of software solutions for the insurance industry. From 1981 to 2007, she served in a variety of financial management positions, including Corporate Controller and Director of Corporate Budgeting and Financial Analysis at Scitex Corporation Ltd., a developer and manufacturer of inkjet printers, and Senior Financial Analyst at Philip Morris Inc. (Altria), a leading consumer goods manufacturer. Ms. Hanover holds a B.A. from the University of Pennsylvania, a B.S. in Economics from The Wharton School of the University of Pennsylvania, as well as an M.B.A. from New York University.
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Jecka Glasman has served as our Chief Commercial Officer since November 2019. Prior to joining our company, Ms. Glasman served as the US General Manager for SodaStream (Nasdaq: SODA) since December 2017. Prior to joining SodaStream, for 3 years since November 2014, Jecka was the President and CEO of Mitsubishi Fuso Trucks of America, A Daimler Trucks subsidiary of Daimler AG (ETR: DAI). Jecka began her career as an Officer in the Israel Defense Forces, followed by a decade in the Israeli Prime Minister’s Office. She then joined Comverse Technology, a world leader in the telecom industry (Nasdaq: CMVT) where she spent over 10 years progressing from a Project Manager to various sales and operations leadership positions covering Central Europe and EMEA. Her last position at Comverse was Senior VP, Global Services Business Unit. Jecka holds an Executive MBA from Tel Aviv University, a BA in Computer Science and a BA in Economics and Business Administration from the Tel Aviv Jaffa Academic College, Israel.
Kobi Mann has served as our Chief Technology Officer since January 2020, prior to which he had held the position of VP Consumables & Application development since September 2017. Kobi Mann joined Kornit in 2004 as an R&D Chemist and has held core technology roles. As one of Kornit’s founders he brings over 17 years of experience in the field of Inkjet Technology. Kobi has played a critical role in the design and the execution of core projects and processes in the company. During his tenure at Kornit, he has managed and led R&D Chemistry, technology groups, transfer to production, Print heads and QA as well as lead Kornit’s Ink plant design. Prior to his executive, Kobi has held several managerial positions including Business Development of Consumables and Director of Global Application, an arena he established in Kornit. Kobi holds a B.Sc. Chemistry and Executive MBA - both from Bar Ilan University in Israel.
Daniel Gazit has served as our Chief Product Officer since November 2022. Daniel joined Kornit as vice president and general manager of the Direct to Fabric business in 2019, and later led the Global Customer success organization. Daniel has more than 20 years’ experience leading large-scale customer facing and operational organizations in the high-tech industry. Prior to joining Kornit, Daniel held the position of VP professional Service and delivery at TEOCO and served as the vice president of global services at Comverse. His prior experience includes various business, technical and operational leadership positions in global high-tech organizations. Daniel Holds a BSc in industrial engineering and management from Tel-Aviv university.
Directors
Yuval Cohen has served as the Chairman of our board of directors since August 2011. Mr. Cohen is the founding and managing partner of Fortissimo Capital, a private equity fund established in 2004 and our former controlling shareholder. From 1997 through 2002, Mr. Cohen was a General Partner at Jerusalem Venture Partners (“JVP”), an Israeli-based venture capital fund. Prior to joining JVP, he held executive positions at various Silicon Valley companies, including DSP Group, Inc. (Nasdaq: DSPG), and Intel Corporation (Nasdaq: INTC). Currently, Mr. Cohen serves as a director of Radware Ltd. (Nasdaq: RDWR). He also serves on the board of directors of several privately held portfolio companies of Fortissimo Capital. Mr. Cohen holds a B.Sc. in Industrial Engineering from Tel Aviv University in Israel and an M.B.A. from Harvard Business School in Massachusetts.
Ofer Ben-Zur is a co-founder of our company and has served as director since 2002. From April 2014 to July 2016, Mr. Ben-Zur served as our President and Chief Technology Officer. From 2002 to April 2014, Mr. Ben-Zur served as our Chief Executive Officer, as well as the manager of our department of research and development. Currently Mr. Ben-Zur serves as the CEO and founder of Tritone Technologies, an Israeli start up specializing in Additive Manufacturing of metals. Mr. Ben-Zur holds a B.Sc. in Mechanical Engineering from the Technion - Israel Institute of Technology in Israel, an M.Sc. in Mechanical Engineering from Tel Aviv University in Israel, and an M.B.A. from Bradford University in England.
Jae Hyun (Jay) Lee has served as a director of our company since August 2022 and prior to that he served as a strategic advisor to the Company since November 2021. Mr. Lee has served as a Senior Vice President of EMEA at eBay Inc. since August 21, 2017. Prior to that, Mr. Lee served as Senior Vice President of Asia Pacific at eBay Inc., which began in July 2015. Mr. Lee began his career at eBay in 2002 and from 2002 to 2004, served as the Chief Executive Officer of eBay’s Korean Internet Auction Company. Prior to joining eBay, Mr. Lee was the Chief Operating Officer and then Chief Executive Officer of Korea Thrunet, the first Korean company to list on the Nasdaq exchange, where he led the company to become the leading cable-based broadband access provider in Korea. Mr. Lee began his career at Boston Consulting Group, where he held various positions in Boston and Seoul, South Korea, before being promoted to Vice President. Mr. Lee holds an M.B.A from Harvard University Graduate School and a Bachelor of Arts Degree in International Relations from Brown University.
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Stephen Nigro has served as a director of our company since August 2019, after having served as a strategic advisor to our company from April through August 2019. Mr. Nigro retired in early 2019 after 37 years at Hewlett-Packard, or HP, most recently serving as President of HP’s 3D printing business, where he created and scaled a new technology and business, serving as a driving force towards HP’s leadership in both the plastic and metal 3D printing markets. Mr. Nigro currently is a director at Desktop Metals (DM:NYSE). He also serves on the Oregon Economic Development Committee and is a member of iUrbanTeen, Executive Council which promotes STEM education to underrepresented teens. Prior to heading HP’s 3D printing business, Mr. Nigro served as Senior Vice President of HP Imaging and Printing Business, where he was responsible for leading HP’s World Wide HP 2D printing business. Prior to that position, Mr. Nigro led the World Wide Inkjet and Graphics Business, which served the consumer, business, and Graphics segments, with both inkjet and LEP printing solutions. Mr. Nigro was involved in initiating several matters at HP, including: delivery of the first HP color inkjet solution to the market; setting up HP’s Inkjet Supplies operation in Singapore; development of HP’s first off-axis inkjet platform; HP’s move into the low-end consumer printing market, delivering a new low-end inkjet platform; creation and scaling of the HP Graphics printing business; the connected printing strategy introducing big data and a new Instant Ink business model; and the creation of the HP 3D printing business. Mr. Nigro spent time at HP’s locations in San Diego, California; Corvallis, Oregon; Singapore; Palo Alto; and Vancouver, Washington. Mr. Nigro holds a bachelor’s degree in mechanical engineering from the University of California at Santa Barbara and a master’s degree in electrical engineering from Stanford University.
Yehoshua (Shuki) Nir has served as a director of our company since July 2018 (until August 2019, as an external director under the Companies Law), and serves as the chairman of our compensation committee and a member of our audit committee. Since June 2021, Mr. Nir has served as a director, a member of the compensation committee and a member of the audit committee, at ironSource Ltd. (NYSE: IS), a global software company that focuses on developing technologies for app monetization. Since July 2021 Mr. Nir has served as a director of Cardo Systems Ltd., which develops, manufactures and markets communication systems for motorcycles. From December 2012 to May 2016, Mr. Nir served as Senior Vice President, Corporate Marketing, and General Manager, Retail of SanDisk Corp., or SanDisk. From March 2008 to November 2012, Mr. Nir served as Senior Vice President and General Manager, Retail of SanDisk. From November 2006 through March 2008, he served in various other sales and marketing roles as a Vice President of SanDisk. Mr. Nir also served in various sales and marketing roles as a Vice President at msystems Ltd. from February 2003 until November 2006, when it was acquired by SanDisk. Prior to that, Mr. Nir held sales and marketing positions at Destinator Ltd. and also co-founded and served as Chief Executive Officer of MindEcho, Inc. Mr. Nir has a B.A. in Law and Accounting and an M.B.A. from Tel Aviv University.
Dov Ofer has served as a member of our board of directors since March 2015 and is a member of our audit and compensation committees. From 2007 to 2013, Mr. Ofer served as Chief Executive Officer of Lumenis Ltd. (Nasdaq: LMNS), a medical laser device company. From 2005 to 2007, he served as Corporate Vice President and General Manager of HP Scitex (formerly a subsidiary of Scailex Corporation Ltd. (TASE: SCIX)), a producer of large format printing equipment. From 2002 to 2005, Mr. Ofer served as President and Chief Executive Officer of Scitex Vision Ltd. Prior to joining Scitex, Mr. Ofer held various managerial positions in the emerging Israeli high-tech sector and participated in different mergers and acquisitions within the industry. Currently, Mr. Ofer serves as chairman of Magen Eco-Energy RCA Ltd., Chairman of Scodix Ltd., Chairman of Stratasys Ltd. (Nasdaq: SSYS) and Director of Copprint. He holds a B.A. in Economics from the Hebrew University in Israel as well as an M.B.A. from the University of California Berkeley in California.
Gabi Seligsohn has served as a member of our board of directors since May 2015. He also served as our Chief Executive Officer from April 2014 through July 2018, and led our successful IPO in April 2015. From August 2006 until August 2013, Mr. Seligsohn served as the President and Chief Executive Officer of Nova Measuring Instruments Ltd., (“Nova”) (Nasdaq: NVMI), a designer, developer and producer of optical metrology solutions. From 1998 until 2006, Mr. Seligsohn served in several leadership positions in Nova. Mr. Seligsohn serves as a director of DSP Group Inc. (Nasdaq: DSPG). He currently also serves on the board of Radware (Nasdaq: RDWR). In 2011, he was voted Chief Executive Officer of the year by the Israeli Institute of Management for hi-tech industries in the large company category. He holds an LL.B. from the University of Reading in Reading, England.
Board Diversity Matrix
| Board Diversity Matrix (as of March 15, 2023) | ||||
| Country of Principal Executive Offices: | Israel | |||
| Foreign Private Issuer | Yes | |||
| Disclosure Prohibited under Home Country Law | No | |||
| Total Number of Directors | 9 | |||
| Female | Male | Non- Binary | Did Not Disclose Gender | |
| Part I: Gender Identity | ||||
| Directors | 1 | 8 | 0 | 0 |
| Part II: Demographic Background | ||||
| Underrepresented Individual in Home Country Jurisdiction | 1* | |||
| LGBTQ+ | 0 | |||
| Did Not Disclose Demographic Background | 0 | |||
| ● | The underrepresented individual is Asian. |
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Arrangements Concerning Election of Directors; Family Relationships
Our board of directors consists of nine directors. We are not a party to, and are not aware of, any voting agreements among our shareholders. In addition, there are no family relationships among our executive officers or senior management members.
| B. | Compensation |
The aggregate compensation recorded and equity-based compensation and other compensation expensed by us and our subsidiaries for our directors and executive officers with respect to the year ended December 31, 2022 was $5.3 million. The foregoing sum includes approximately $0.6 million set aside or accrued to provide pension, severance, retirement or similar benefits or expenses. The foregoing sum also includes all compensation amounts (including notice period and/or severance payments) paid in respect of the employment and/or director services (as applicable) provided by two former executive officers and one former director whose service for our company terminated over the course of the year ended December 31, 2022. As of December 31, 2022, options to purchase 185.4 ordinary shares, 123.4 restricted share units, or RSUs, and 106.4 Performance Share Units, or PSUs, granted to our directors and executive officers were outstanding under our share incentive plans, with a weighted average exercise price of $40.69 per share for the options. Certain of our officers receive a severance payment of up to four months’ of their base salary upon termination of their employment.
The following table presents the grant dates, number of options, RSUs and PSUs, and related exercise prices and expiration dates of options and RSUs granted to our directors and executive officers for the year ended December 31, 2022:
| Grant Date | Number of Options | Number of RSUs | Number of PSUs | Exercise
| Expiration Date of Options | |||||||||||||||
| January 31, 2022 | 32,000 | - | - | 105.06 | January 31, 2032 | |||||||||||||||
| February 16, 2022 | - | 4,738 | - | - | - | |||||||||||||||
| March 20, 2022 | - | 1,500 | - | - | - | |||||||||||||||
| August 10, 2022 | - | 9,269 | - | - | - | |||||||||||||||
| August 11, 2022 | 23,775 | 37,700 | 27,457 | 35.51 | August 11, 2032 | |||||||||||||||
| September 19, 2022 | - | 4,385 | - | - | - | |||||||||||||||
| November 9, 2022 | - | 10,471 | - | - | - | |||||||||||||||
| December 15, 2022 | - | 5,000 | - | - | - | |||||||||||||||
| December 29, 2022 | 23,158 | 29,813 | 54,496 | 22.02 | December 29, 2032 | |||||||||||||||
Director Compensation
Under the Companies Law, the compensation of our directors (including reimbursement of expenses) requires the approval of our compensation committee, the subsequent approval of the board of directors and, unless exempted under the regulations promulgated under the Companies Law, the approval of the shareholders at a general meeting as described in “C. Board Practices-Approval of Related Party Transactions under Israeli Law - Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions.” Where the director is also a controlling shareholder, the requirements for approval of transactions with controlling shareholders apply, as described below under “-Approval of Related Party Transactions under Israeli Law - Disclosure of Personal Interests of a Controlling Shareholder and Approval of Certain Transactions.”
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Our directors are entitled to cash compensation as follows:
All of our non-employee directors receive annual fees and per-meeting fees for their service on our board and its committees as follows:
| ● | annual fees in an amount of $45,000, and $95,000 for the chairman; | |
| ● | committee chair retainer - Audit: $20,000; Compensation: $15,000; any other committee - up to $15,000; and | |
| ● | committee member retainer - Audit: $10,000; Compensation: $7,500; Any other committee: up to a maximum of $7,500. |
In addition, commencing with our 2020 annual general meeting of shareholders, we provide for annual RSU grants to our non-employee directors. The number of RSUs granted to each director is linked to a fixed value- $115,000 to all non-employee directors. The actual number of RSUs to be granted each year with the foregoing $115,000 values is determined based on the closing price of our ordinary shares on the Nasdaq Global Select Market on the date of our annual shareholder meeting. Our RSU grant agreements for non-employee directors are subject to the following additional terms:
| ● | the RSUs are granted to each non-employee director as of the date of the annual shareholder meeting and on the date of each annual general meeting thereafter; | |
| ● | the RSUs vest in their entirety on the earlier of (x) the first anniversary of the grant or (y) the next annual general meeting of shareholders, provided the director continues to serve as a director of our company at such date; | |
| ● | the RSUs, to the extent then unvested, become fully vested (a) immediately prior to the consummation of a Change of Control (as defined under our 2015 Plan (described below)) in which the director is required to resign from or is otherwise terminated from the service as a director, or (b) upon termination of service of such director occurring immediately after the consummation of a Change of Control; and | |
| ● | the RSUs are otherwise subject to the terms of the 2015 Plan. |
Executive Officer Compensation
The table below outlines the compensation granted to our five most highly compensated office holders during or with respect to the year ended December 31, 2022, in the disclosure format of Regulation 21 of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
For purposes of the table and the summary below, and in accordance with the above-mentioned securities regulations, “compensation” includes base salary, variable compensation, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation.
Summary Compensation Table
Information Regarding Covered Executives(1)
| Base | Benefits and | Variable | Equity-Based | |||||||||||||||||
| Salary | Perquisites | compensation | Compensation | Total | ||||||||||||||||
| Name and Principal Position(2) | ($) | ($)(3) | ($)(4) | ($)(5) | ($) | |||||||||||||||
| (in thousands, US dollars) | ||||||||||||||||||||
| Ronen Samuel, Chief Executive Officer | 426 | 144 | - | 1,530 | 2,100 | |||||||||||||||
| Charles (Chuck) Meyo, President KDAM | 323 | 54 | 108 | 431 | 916 | |||||||||||||||
| Kobi Mann, Chief Technology Officer | 249 | 61 | - | 531 | 841 | |||||||||||||||
| Amir Shaked-Mandel, EVP Corporate Development | 234 | 84 | 16 | 474 | 808 | |||||||||||||||
| Chris Govier, President EMEA | 234 | 16 | 11 | 534 | 795 | |||||||||||||||
| (1) | All amounts reported in the table are in terms of cost to us, as recorded in our financial statements. |
| (2) | All current executive officers listed in the table were our full-time employees during 2022. Cash compensation amounts denominated in currencies other than the U.S. dollar were converted into U.S. dollars at the average conversion rate for 2022. |
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| (3) | Amounts reported in this column include benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include, to the extent applicable to the executive, payments, contributions and/or allocations for savings funds, pension, severance, vacation, car or car allowance, medical insurances and benefits, risk insurances (e.g., life, disability, accident), convalescence pay, payments for social security, tax gross-up payments and other benefits and perquisites consistent with our guidelines. |
| (4) | Amounts reported in this column refer to incentive and variable compensation payments which were paid or accrued with respect to 2022. |
| (5) | Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2022 with respect to equity-based compensation. Assumptions and key variables used in the calculation of such amounts are described in paragraph (s) of Note 2 to our audited financial statements, which are included in “ITEM 18. Financial Statements” of this annual report. |
2012 Share Incentive Plan
In October 2012, our board of directors adopted and our shareholders approved our 2012 Share Incentive Plan, or the 2012 Plan. The 2012 Plan replaced our 2004 Plan. We no longer grant equity awards under the 2012 Plan because it was superseded by the 2015 Plan and expired (for purposes of granting new awards) in October 2022, although awards that were previously granted under the 2012 Plan remain outstanding. The 2012 Plan provided for the grant of options, restricted shares, restricted share units and other share-based awards to our and our subsidiaries’ and affiliates’ directors, employees, officers, consultants, advisors, and any other person whose services are considered valuable to us or our affiliates, to continue as service providers, to increase their efforts on our behalf or on behalf of our subsidiary or affiliate and to promote the success of our business. As of December 31, 2022, we had options to purchase 62,670 ordinary shares that remained outstanding under the 2012 Plan.
2015 Incentive Compensation Plan
In March 2015, we adopted our 2015 Incentive Compensation Plan, or the 2015 Plan. The 2015 Plan provides for the grant of share options, share appreciation rights, restricted share awards, restricted share units, cash-based awards, other share-based awards and dividend equivalents to our company’s and our affiliates’ respective employees, non-employee directors and consultants. The reserved pool of shares under the 2015 Plan is the sum of (i) 661,745 shares; plus (ii) on January 1 of each calendar year during the term of the 2015 Plan, a number of shares equal to the least of: (x) 3% of the total number of shares outstanding on December 31 of the immediately preceding calendar year, (y) an amount determined by our board of directors, and (z) 1,965,930 shares. From and after the effective date of the 2015 Plan, no further grants or awards have been made under the 2012 Plan. Generally, shares that are forfeited, cancelled, terminated or expire unexercised, settled in cash in lieu of issuance of shares under the 2015 Plan or the 2012 Plan shall be available for issuance under new awards under the 2015 Plan. Generally, any shares tendered or withheld to pay the exercise price, purchase price of an award, or any withholding taxes shall be available for issuance under new awards. Shares delivered pursuant to “substitute awards” (awards granted in assumption or substitution of awards granted by a company acquired by us) shall not reduce the shares available for issuance under the 2015 Plan.
As of December 31, 2022, we had options to purchase 668,322 ordinary shares, 1,050,339 unvested RSUs (a portion of which are subject to performance based vesting conditions), outstanding under the 2015 Plan. As of December 31, 2022, we had 3,567,317 ordinary shares reserved for additional grants.
Subject to applicable law, the 2015 Plan is administered by our compensation committee, which has full authority in all matters related to the discharge of its responsibilities and the exercise of its authority under the plan. Awards under the 2015 Plan may be granted until 10 years after the effective date of the 2015 Plan.
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The terms of options granted under the 2015 Plan, including the exercise price, vesting provisions and the duration of an option, are determined by the compensation committee and set forth in an award agreement. Except as provided in the applicable award agreement, or in the discretion of the compensation committee, an option may be exercised only to the extent that it is then exercisable and shall terminate immediately upon a termination of service of the grantee. However, our award agreements generally provide for an exercise period that extends 90 days following the termination of the employment or service of the grantee, other than in special cases such as termination for cause.
Share appreciation rights, or SARs, are awards entitling a grantee to receive a payment representing the difference between the base price per share of the right and the fair market value of a share on the date of exercise. SARs may be granted in tandem with an option or independent and unrelated to an option. The terms of SARs granted under the 2015 Plan, including the base price per share, vesting provisions and the duration of an SAR, shall be determined by the compensation committee and set forth in an award agreement. Except as provided in the applicable award agreement, or in the discretion of the compensation committee, an SAR may be exercised only to the extent that it is then exercisable and shall terminate immediately upon a termination of service of the grantee. We generally provide for an exercise period that extends 90 days following the termination of the employment or service of the grantee, other than in special cases such as termination for cause. At the discretion of the compensation committee, SARs will be payable in cash, ordinary shares or equivalent value or some combination thereof.
Restricted share awards are ordinary shares that are awarded to a grantee subject to the satisfaction of the terms and conditions established by the compensation committee in the award agreement. Until such time as the applicable restrictions lapse, restricted shares are subject to forfeiture and may not be sold, assigned, pledged or otherwise disposed of by the grantee who holds those shares.
RSUs are awards covering a number of hypothetical units with respect to shares that are granted subject to such vesting and transfer restrictions and conditions of payment as the compensation committee may determine in an award agreement. RSUs, once vested, may be settled for the grantee in cash, ordinary shares of equivalent value, or a combination thereof.
The 2015 Plan provides for the grant of cash-based award and other share-based awards (which are equity-based or equity related award not otherwise described in the 2015 Plan). The terms of such cash-based awards or other share-based shall be determined by the compensation committee and set forth in the award agreement.
The compensation committee may grant dividend equivalents based on the dividends declared on shares that are subject to any award. Dividend equivalents may be subject to any limitations and/or restrictions determined by the compensation committee and shall be converted to cash or additional shares by such formula and at such time, and shall be paid at such times, as may be determined by the compensation committee.
In the event of any dividend (excluding any ordinary dividend) or other distribution, recapitalization, share split, reverse share split, reorganization, merger, consolidation, split-up, split-off, combination, repurchase or exchange of shares or similar event (including a change in control) that affects the ordinary shares, the compensation committee shall make any such adjustments in such manner as it may deem equitable, including any or all of the following: (i) adjusting the number of shares available for grant under the 2015 Plan, (ii) adjusting the terms of outstanding awards, (iii) providing for a substitution or assumption of awards and (iv) cancelling awards in exchange for a payment in cash. In the event of a change of control, each outstanding award shall be treated as the compensation committee determines, including, without limitation, (i) that each award be honored or assumed, or equivalent rights substituted therefor, by the new employer or (ii) that all unvested awards will terminate upon the change in control. Notwithstanding the foregoing, in the event that it is determined that neither (i) or (ii) in the preceding sentence will apply, all awards will become fully vested.
2015 Israeli Sub Plan
The 2015 Israeli Sub Plan provides for the grant by us of awards pursuant to Sections 102 and 3(i) of the Ordinance, and the rules and regulations promulgated thereunder. The 2015 Israeli Sub Plan is effective with respect to awards granted as of 30 days from the date we submitted it to the ITA. The 2015 Israeli Sub Plan provides for awards to be granted to those of our or our affiliates’ employees, directors and officers who are not Controlling Shareholders, as defined in the Ordinance, and who are considered Israeli residents, to the extent that such awards either are (i) intended to qualify for special tax treatment under the “capital gains track” provisions of Section 102(b) of the Ordinance or (ii) not intended to qualify for such special tax treatment. The 2015 Israeli Sub Plan also provides for the grant of awards under Section 3(i) of the Ordinance to our Israeli non-employee service providers and Controlling Shareholders, who are not eligible for such special tax treatment.
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2015 U.S. Sub Plan
The 2015 U.S. Sub Plan applies to grantees that are subject to U.S. federal income tax. The 2015 U.S. Sub Plan provides that options granted to the U.S. grantees will either be incentive stock options pursuant to Section 422 of the Code, or nonqualified stock options. Options, other than certain incentive stock options described below, must have an exercise price not less than 100% of the fair market value of an underlying share on the date of grant. Incentive stock options that are not exercised within 10 years from the grant date expire, provided that incentive stock options granted to a person holding more than 10% of our voting power will expire within five years from the date of the grant and must have an exercise price at least equal to 110% of the fair market value of an underlying share on the date of grant. The number of shares available under the 2015 Plan for grants of incentive stock options shall be the total number of shares available under the 2015 Plan subject to any limitations under the Code and provided that shares delivered pursuant to “substitute awards” shall reduce the shares available for issuance of incentive stock options under the 2015 Plan. It is the intention that no award shall be deferred compensation subject to Section 409A of the Code unless and to the extent that the compensation committee specifically determines otherwise. If the compensation committee determines an award will be subject to Section 409A of the Code such awards shall be intended to comply in all respects with Section 409A of the Code, and the 2015 Plan and the terms and conditions of such awards shall be interpreted and administered accordingly.
Employee Share Purchase Plan
We have adopted an employee share purchase plan, or ESPP, pursuant to which our employees and employees of our subsidiaries may elect to have payroll deductions (or, when not allowed under local laws or regulations, another form of payment) made on each pay day during the offering period in an amount not exceeding 15% of the compensation which the employees receive on each pay day during the offering period. To date, we have not granted employees the right to make purchases under the plan. The number of shares initially reserved for purchase under the ESPP was 242,425 ordinary shares, which was to be automatically increased annually on January 1 by a number of ordinary shares equal to the least of (i) 1% of the total number of shares outstanding on December 31 of the immediately preceding calendar year, (ii) an amount determined by our board of directors, if so determined prior to January 1 of the year on which the increase will occur, and (iii) 655,310 shares.
The ESPP is to be administered by our board of directors or by a committee designated by the board of directors. Subject to those rights which are reserved to the board of directors or which require shareholder approval under Israeli law, our board of directors has designated the compensation committee to administer the ESPP. To the extent that we grant employees the right to make purchases under the ESPP, on the first day of each offering period, each participating employee will be granted an option to purchase on the exercise date of such offering period up to a number of our ordinary shares determined by dividing (1) the employee’s payroll deductions accumulated prior to such exercise date and retained in the employee’s account as of the exercise date by (2) the applicable purchase price. The applicable purchase price is to be based on a discount percentage of up to 15%, which percentage may be decreased by the board or the compensation committee, multiplied by the lesser of (1) the fair market value of an ordinary share on the exercise date, or (2) the fair market value of an ordinary share on the offering date.
| C. | Board Practices |
Board of Directors
Under the Companies Law, the management of our business is vested in our board of directors. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our board of directors. Our Chief Executive Officer is appointed by, and serves at the discretion of, our board of directors, subject to the employment agreement that we have entered into with him. All other executive officers are also appointed by our board of directors and are subject to the terms of any applicable employment agreements that we may enter into with them.
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Under our articles, our board of directors must consist of at least five and not more than nine directors, including, to the extent applicable, at least two external directors who may be required to be appointed under the Companies Law. Our board of directors currently consists of nine directors. Our directors are divided into three classes with staggered three-year terms. Each class of directors consists, as nearly as possible, of one-third of the total number of directors constituting the entire board of directors (other than the external directors, to the extent applicable). At each annual general meeting of our shareholders, the election or re-election of directors following the expiration of the term of office of the directors of that class of directors is for a term of office that expires on the third annual general meeting following such election or re-election, such that at each annual general meeting the term of office of only one class of directors expires. Each director will hold office until the annual general meeting of our shareholders in which his or her term expires, unless he or she is removed by a vote of 65% of the total voting power of our shareholders at a general meeting of our shareholders or upon the occurrence of certain events, in accordance with the Companies Law and our articles.
In August 2019, we elected to be governed by an exemption under the Companies Law regulations that exempts us from appointing external directors and from complying with the Companies Law requirements related to the composition of the audit committee and compensation committee of our board of directors. Our eligibility for that exemption is conditioned upon: (i) the continued listing of our ordinary shares on the Nasdaq Stock Market (or one of a few select other non-Israeli stock exchanges); (ii) there not being a controlling shareholder (generally understood in this context to be a 25% or greater shareholder) of our company under the Companies Law; and (iii) our compliance with the Nasdaq Listing Rules requirements as to the composition of (a) our board of directors-which requires that we maintain a majority of independent directors (as defined under the Nasdaq Listing Rules) on our board of directors and (b) the audit and compensation committees of our board of directors (which require that such committees consist solely of independent directors (at least three and two members, respectively), as described under the Nasdaq Listing Rules). At the time that it determined to exempt our company from the external director requirement, our board affirmatively determined that we meet the conditions for exemption from the external director requirement, including that a majority of the members of our board, along with each of the members of the audit and compensation committees of the board, are independent under the Nasdaq Listing Rules.
As a result of our election to be exempt from the external director requirement under the Companies Law, each of our directors (including our two directors who formerly served as external directors) is now assigned to one of the three, staggered classes of our board of directors, as follows:
| (i) | the Class I directors are Jae Hyun (Jay) Lee, Yehoshua (Shuki) Nir and Dov Ofer, whose terms will expire at our annual general meeting of shareholders to be held in 2025 and when their successors are elected and qualified;; |
| (ii) | the Class II directors are Ofer Ben-Zur, Lauri Hanover and Gabi Seligsohn, and their terms expire at our annual general meeting of shareholders to be held in 2023 and when their successors are elected and qualified; and |
| (iii) | the Class III directors are Yuval Cohen, Stephen Nigro and Ronen Samuel, and their terms expire at our annual general meeting of shareholders to be held in 2024 and when their successors are elected and qualified. |
Our board of directors has determined that seven of our directors, consisting of Yuval Cohen, Ofer Ben-Zur, Jae Hyun (Jay) Lee, Stephen Nigro, Yehoshua (Shuki) Nir, Dov Ofer and Gabi Seligsohn, constituting a majority of the members of the board, are independent under the rules of the Nasdaq Stock Market. The definition of independent director under the Nasdaq Stock Market rules specifies criteria whose aim is to ensure that there is no factor that would impair the ability of the independent director to exercise independent judgment, and furthermore requires that the board of directors affirmatively determine that the independent director can exercise independent judgment.
Under the Companies Law and our articles, besides nominees who are chosen by our board of directors, nominees for director may also be proposed by any shareholder holding at least 1% of our outstanding voting power. However, any such shareholder may propose a nominee only if a written notice of such shareholder’s intent to propose a nominee has been given to our Secretary (or, if we have no such Secretary, our Chief Executive Officer) within seven days following our publication of notice of an upcoming annual shareholder meeting (or within 14 days after we publish a preliminary notification of an upcoming annual shareholder meeting). Any such shareholder nomination must include certain information, including, among other things, a description of all arrangements between the nominating shareholder and the proposed director nominee(s) and any other person pursuant to which the nomination(s) are to be made by the nominating shareholder, the consent of the proposed director nominee(s) to serve as our director(s) if elected and a declaration signed by the nominee(s) declaring that there is no limitation under the Companies Law preventing their election, and that all of the information that is required under the Companies Law to be provided to us in connection with such election has been provided.
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In addition, our articles allow our board of directors to appoint directors to fill vacancies on our board of directors for a term of office equal to the remaining period of the term of office of the director(s) whose office(s) have been vacated. External directors-when we are subject to, or choose to be bound by, the requirement to elect them-are elected for an initial term of three years and may be elected for additional three-year terms under the circumstances described below.
Under the Companies Law, our board of directors must determine the minimum number of directors who are required to have accounting and financial expertise. In determining the number of directors required to have such expertise, our board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that the minimum number of directors of our company who are required to have accounting and financial expertise is one.
External Directors
Under the Companies Law, the boards of directors of companies whose shares are publicly traded, including companies with shares traded in the United States, are generally required to include at least two members who qualify as external directors. In August 2019, we elected to be governed by the exemption from maintaining external directors on our board under the Companies Law (as described above).
Our election to exempt our company from compliance with the external director requirement can be reversed at any time by our board of directors, in which case we would need to hold a shareholder meeting to once again appoint external directors, whose election would be for a three-year term. The election of each external director would require approval by a majority vote of the shares present and voting at a meeting of shareholders, provided that either:
| ● | such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and who lack a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that are voted at the meeting, excluding abstentions, to which we refer as a disinterested majority; or | |
| ● | the total number of shares voted by non-controlling, disinterested shareholders and by shareholders (as described in the previous bullet point) against the election of the external director does not exceed 2% of the aggregate voting rights in the company. |
The term “controlling shareholder” as used in the Companies Law for purposes of all matters related to external directors and for certain other purposes (such as the requirements related to appointment to the audit committee or compensation committee, as described below), means a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager (chief executive officer).
For further information concerning the Companies Law provisions related to external directors, please see “ITEM 6. Directors, Senior Management and Employees - C. Board Practices - Board of Directors - External Directors” in our annual report on Form 20-F for the year ended December 31, 2018, which we filed with the SEC on March 26, 2019.
Leadership Structure of the Board
In accordance with the Companies Law and our articles, our board of directors is required to appoint one of its members to serve as chairman of the board of directors. Our board of directors has appointed Yuval Cohen to serve as chairman of the board of directors.
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Board Committees
Audit Committee
Our audit committee consists of three members: Yehoshua (Shuki) Nir, Dov Ofer (Chairperson), and Gabi Seligsohn.
Companies Law Requirements
Under the Companies Law, we are required to appoint an audit committee. The audit committee must be comprised of at least three directors. To the extent a company is required to appoint external directors, this committee must include all of the external directors, one of whom must serve as chairman of the committee. There are additional requirements as to the composition of the audit committee under the Companies Law. However, when we elected to exempt our company from the external director requirement, we concurrently elected to exempt our company from all of such requirements (which exemption is conditioned on our fulfillment of all Nasdaq listing requirements related to the composition of the audit committee).
Nasdaq Listing Requirements
Under Nasdaq corporate governance rules, we are required to maintain an audit committee consisting of at least three independent directors, each of whom is financially literate and one of whom has accounting or related financial management expertise.
All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and Nasdaq corporate governance rules. Our board of directors has determined that Dov Ofer qualifies as an audit committee financial expert, as defined by the SEC rules, and has the requisite financial experience, as defined by the Nasdaq corporate governance rules.
Each of the members of our audit committee is “independent” as such term is defined in Rule 10A-3(b)(1) under the Exchange Act and satisfies the independent director requirements under the Nasdaq Stock Market rules.
Audit Committee Role
Our board of directors has adopted an audit committee charter that sets forth the responsibilities of the audit committee consistent with the rules and regulations of the SEC and the listing requirements of the Nasdaq Stock Market, as well as the requirements for such committee under the Companies Law, including the following:
| ● | oversight of our independent registered public accounting firm and recommending the engagement, compensation or termination of engagement of our independent registered public accounting firm to the board of directors in accordance with Israeli law; | |
| ● | recommending the engagement or termination of the person filling the office of our internal auditor; and | |
| ● | recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by our board of directors. |
Our audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent of management.
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Under the Companies Law, our audit committee is responsible for:
| ● | determining whether there are deficiencies in the business management practices of our company, including in consultation with our internal auditor or the independent auditor, and making recommendations to the board of directors to improve such practices; | |
| ● | determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest and whether such transaction is material or extraordinary under the Companies Law) (see “-Approval of Related Party Transactions under Israeli Law”); | |
| ● | establishing the approval process (including, potentially, the approval of the audit committee and conducting a competitive procedure supervised by the audit committee) for certain transactions with a controlling shareholder or in which a controlling shareholder has a personal interest; | |
| ● | where the board of directors approves the working plan of the internal auditor, examining such working plan before its submission to the board of directors and proposing amendments thereto; | |
| ● | examining our internal audit controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to fulfill his or her responsibilities; | |
| ● | examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment of our auditor; and | |
| ● | establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees. |
As part of its capacity in overseeing risk management activities and monitoring management’s policies and procedures, our audit committee also plays a significant strategic role in coordinating our cyber risk initiatives and policies and confirming their efficacy.
Compensation Committee and Compensation Policy
Our compensation committee consists of three members: Yehoshua (Shuki) Nir (Chairman), Stephen Nigro, and Dov Ofer.
Companies Law Requirements
Under the Companies Law, the board of directors of a public company must appoint a compensation committee. To the extent a company is required to appoint external directors, the compensation committee must be comprised of at least three directors, including all of the external directors, who must constitute a majority of the members of, and include the chairman of, the compensation committee. There are additional requirements as to the composition of the compensation committee under the Companies Law. However, when we elected to exempt our company from the external director requirement, we concurrently elected to exempt our company from all of such requirements (including the three-member minimum). Our exemption under the Companies Law is conditioned on our fulfillment of all Nasdaq listing requirements related to the composition of the compensation committee.
The duties of the compensation committee include the recommendation to the company’s board of directors of a policy regarding the terms of engagement of office holders, to which we refer as a compensation policy. That policy must be adopted by the company’s board of directors, after considering the recommendations of the compensation committee, and must be brought for approval by the company’s shareholders, which approval requires what we refer to as a Special Approval for Compensation. A Special Approval for Compensation requires shareholder approval by a majority vote of the shares present and voting at a meeting of shareholders called for such purpose, provided that either: (a) such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such compensation arrangement; or (b) the total number of shares of non-controlling shareholders who do not have a personal interest in the compensation arrangement and who vote against the arrangement does not exceed 2% of the company’s aggregate voting rights.
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The compensation policy must serve as the basis for decisions concerning the financial terms of employment or engagement of office holders, including exculpation, insurance, indemnification or any monetary payment, obligation of payment or other benefit in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives, the company’s business plan and its long-term strategy, and creation of appropriate incentives for office holders. It must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation policy must include certain principles, such as: a link between variable compensation and long-term performance and measurable criteria; the relationship between variable and fixed compensation; and the minimum holding or vesting period for variable, equity-based compensation.
The compensation committee is responsible for (a) recommending the compensation policy to a company’s board of directors for its approval (and subsequent approval by its shareholders) and (b) duties related to the compensation policy and to the compensation of a company’s office holders, as well as functions with respect to matters related to approval of the terms of engagement of office holders, including:
| ● | recommending whether a compensation policy should continue in effect, if the then-current policy has a term of greater than three years (approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three years); |
| ● | recommending to the board of directors periodic updates to the compensation policy and assessing implementation of the compensation policy; |
| ● | approving compensation terms of executive officers, directors and employees that require approval of the compensation committee; |
| ● | determining whether the compensation terms of a chief executive officer nominee, which were determined pursuant to the compensation policy, will be exempt from approval of the shareholders because such approval would harm the ability to engage with such nominee; and |
| ● | determining, subject to the approval of the board and under special circumstances, override a determination of the company’s shareholders regarding certain compensation related issues. |
Consistent with the foregoing requirements, following the recommendation of our compensation committee, our board and our shareholders approved our compensation policy in July 2020 and August 2020, respectively. Following that approval, the compensation policy (in updated form, if applicable) will need to be recommended by the compensation committee and presented for the approval of the board and shareholders, every three years, in accordance with the requirements of the Companies Law.
Nasdaq Listing Requirements
Under Nasdaq corporate governance rules, we are required to maintain a compensation committee consisting of at least two independent directors. Each of the members of the compensation committee is required to be independent under Nasdaq rules relating to compensation committee members, which are different from the general test for independence of board and committee members. Each of the members of our compensation committee satisfies those requirements.
Compensation Committee Role
Our board of directors has adopted a compensation committee charter that sets forth the responsibilities of the compensation committee, which include:
| ● | the responsibilities set forth in the compensation committee charter; | |
| ● | reviewing and approving the granting of options and other incentive awards to the extent such authority is delegated by our board of directors; and | |
| ● | reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors. |
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Additional Governance Committees
ESG Steering Committee
Our board has appointed an ESG steering committee that is responsible for formulating policy, devising strategy, and ensuring governed execution concerning all ESG matters. Members of this committee include representatives of the middle and senior management levels from most departments of our company, including operations, technology, product, legal, finance, business, and HR. The ESG steering committee meets on a monthly basis.
With respect to oversight of ESG-related risks and opportunities, each board committee is assigned responsibility for oversight of matters most applicable to their responsibilities. We believe that allocating responsibility to a committee with relevant knowledge and experience improves the effectiveness of the board’s oversight. For example, the audit committee oversees risks related to regulatory, financial, and compliance matters, while the compensation committee oversees the implementation of our compensation policy and practices designed to ensure equitable pay across our organization.
Compensation of Directors
Under the Companies Law, compensation of directors requires the approval of a company’s compensation committee, the subsequent approval of the board of directors and, unless exempted under the regulations promulgated under the Companies Law, the approval of the shareholders at a general meeting. Where the director is also a controlling shareholder, the requirements for approval of transactions with controlling shareholders apply, as described below under “Disclosure of Personal Interests of a Controlling Shareholder and Approval of Certain Transactions.”
For information regarding the current compensation package that is paid to our non-employee directors, see “B. Compensation-Director Compensation” in this ITEM 6. Our directors are also entitled to be paid reasonable travel, hotel and other expenses expended by them in attending board meetings and performing their functions as directors of the company, all of which is to be determined by the board of directors.
External directors (when we are required to have them serving on our board of directors) are entitled to remuneration subject to the provisions and limitations set forth in the regulations promulgated under the Companies Law.
Internal Auditor
Under the Companies Law, the board of directors of an Israeli public company must appoint an internal auditor recommended by the audit committee. An internal auditor may not be:
| ● | a person (or a relative of a person) who holds 5% or more of the company’s outstanding shares or voting rights; |
| ● | a person (or a relative of a person) who has the power to appoint a director or the general manager of the company; |
| ● | an office holder (including a director) of the company (or a relative thereof); or |
| ● | a member of the company’s independent auditor, or anyone on its behalf. |
The role of the internal auditor is to examine, among other things, our compliance with applicable law and orderly business procedures. The audit committee is required to oversee the activities and to assess the performance of the internal auditor as well as to review the internal auditor’s work plan. Hila Barr - Hoisman of Brightman Almagor & Zohar (Deloitte) serves as our internal auditor.
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Approval of Related Party Transactions Under Israeli Law
Fiduciary Duties of Directors and Executive Officers
The Companies Law codifies the fiduciary duties that office holders owe to a company. Each person listed in the table under “Directors and Senior Management” is an office holder of our company under the Companies Law.
An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty requires that an office holder act in good faith and in the best interests of the company.
The duty of care includes a duty to use reasonable means to obtain:
| ● | information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and |
| ● | all other important information pertaining to any such action. |
The duty of loyalty includes a duty to:
| ● | refrain from any conflict of interest between the performance of his or her duties to the company and his or her other duties or personal affairs; |
| ● | refrain from any activity that is competitive with the business of the company; |
| ● | refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and |
| ● | disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder. |
Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions
The Companies Law requires that an office holder promptly disclose to the board of directors any conflict of interest (referred to under the Companies Law as a “personal interest”) that he or she may be aware of and all related material information or documents concerning any existing or proposed transaction with the company. An interested office holder’s disclosure must be made promptly and, in any event, no later than the first meeting of the board of directors at which the transaction is considered. A personal interest includes an interest of any person in an act or transaction of a company, including a personal interest of such person’s relative or of a corporate body in which such person or a relative of such person is a 5% or greater shareholder, director or general manager (i.e., chief executive officer) or in which he or she has the right to appoint at least one director or the general manager, but excluding a personal interest stemming from one’s ownership of shares in the company.
A personal interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the personal interest of the office holder with respect to his or her vote on behalf of a person for whom he or she holds a proxy even if such shareholder has no personal interest in the matter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction. Under the Companies Law, an extraordinary transaction is defined as any of the following:
| ● | a transaction other than in the ordinary course of business; |
| ● | a transaction that is not on market terms; or |
| ● | a transaction that may have a material impact on a company’s profitability, assets or liabilities. |
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If it is determined that an office holder has a personal interest in a transaction which is not an extraordinary transaction, approval by the board of directors is required for the transaction, unless the company’s articles of association provide for a different method of approval. Further, so long as an office holder has disclosed his or her personal interest in a transaction, the board of directors may approve an action by the office holder that would otherwise be deemed a breach of his or her duty of loyalty. However, a company may not approve a transaction or action that is not in the best interests of the company or that is not performed by the office holder in good faith. An extraordinary transaction in which an office holder has a personal interest requires approval first by the company’s audit committee and subsequently by the board of directors. The compensation of, or an undertaking to indemnify or insure, an office holder who is not a director requires approval first by the company’s compensation committee, then by the company’s board of directors. If such compensation arrangement or an undertaking to indemnify or insure is inconsistent with the company’s stated compensation policy, or if the office holder is the chief executive officer (apart from a number of specific exceptions), then such arrangement is further subject to a Special Approval for Compensation. Arrangements regarding the compensation, indemnification or insurance of a director require the approval of the compensation committee, board of directors and shareholders by ordinary majority, in that order, and under certain circumstances, a Special Approval for Compensation.
Generally, a person who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit or compensation committees may not be present at such a meeting or vote on that matter unless the chairman of the relevant committee or board of directors (as applicable) determines that he or she should be present in order to present the transaction that is subject to approval. If a majority of the members of the board committee or the board of directors (as applicable) has a personal interest in the approval of a transaction, then all directors may participate in discussions of the committee or the board of directors (as applicable) on such transaction and the voting on approval thereof, but shareholder approval is also required for such transaction.
Disclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions
Pursuant to Israeli law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company. The Companies Law provides a broader definition of a controlling shareholder solely with respect to the provisions pertaining to related party transactions. For such purposes, a controlling shareholder is a shareholder that has the ability to direct the activities of a company, including by holding 50% or more of the voting rights in a company or by having the right to appoint the majority of the directors of the company or its general manager (chief executive officer), and furthermore, by holding 25% or more of the voting rights if no other shareholder holds more than 50% of the voting rights. For this purpose, the holdings of all shareholders who have a personal interest in the same transaction will be aggregated. An extraordinary transaction between a public company and a controlling shareholder or in which a controlling shareholder has a personal interest and the terms of any compensation arrangement of a controlling shareholder who is an office holder or his relative, require the approval of a company’s audit committee (or compensation committee with respect to compensation arrangements), board of directors and shareholders, in that order. In addition, the shareholder approval must fulfil one of the following requirements:
| ● | at least a majority of the shares held by all shareholders who do not have a personal interest in the transaction and who are present and voting at the meeting approves the transaction, excluding abstentions; or |
| ● | the shares voted against the transaction by shareholders who have no personal interest in the transaction and who are present and voting at the meeting do not exceed 2% of the voting rights in the company. |
To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every three years, unless, with respect to certain transactions, the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.
Arrangements regarding the compensation, indemnification or insurance of a controlling shareholder in his or her capacity as an office holder require the approval of the compensation committee, board of directors and shareholders by a Special Majority, in that order, and the terms thereof may not be inconsistent with the company’s stated compensation policy.
Pursuant to regulations promulgated under the Companies Law, certain transactions with a controlling shareholder or his or her relative, with directors, or with the chief executive officer, that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval upon certain determinations of the audit committee or compensation committee (as applicable), and the board of directors.
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Shareholder Duties
Pursuant to the Companies Law, a shareholder has a duty to act in good faith and in a customary manner toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting at a general meeting and at shareholder class meetings with respect to the following matters:
| ● | an amendment to the company’s articles of association; |
| ● | an increase of the company’s authorized share capital; |
| ● | a merger; or |
| ● | the approval of related party transactions and acts of office holders that require shareholder approval. |
A shareholder also has a general duty to refrain from discriminating against other shareholders.
In addition, certain shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that he or she has the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or to prevent the appointment of an office holder of the company or other power towards the company. The Companies Law does not define the substance of the duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness.
Exculpation, Insurance and Indemnification of Directors and Officers
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is included in its articles of association. Our articles include such a provision. A company may not exculpate in advance a director from liability arising out of a prohibited dividend or distribution to shareholders.
Under the Companies Law, a company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts performed by him or her as an office holder, either pursuant to an undertaking made in advance of an event or following an event, provided its articles of association include a provision authorizing such indemnification:
| ● | financial liability imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned foreseen events and amount or criteria; |
| ● | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder (1) as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding, and (ii) no financial liability was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and (2) in connection with a monetary sanction; and |
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| ● | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for an offense that does not require proof of criminal intent. |
Under the Companies Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder, if and to the extent provided in the company’s articles of association:
| ● | a breach of the duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company; |
| ● | a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder; and |
| ● | a financial liability imposed on the office holder in favor of a third party. |
Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
| ● | a breach of the duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company; |
| ● | a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder; |
| ● | an act or omission committed with intent to derive illegal personal benefit; or |
| ● | a fine or forfeit levied against the office holder. |
Under the Companies Law, exculpation, indemnification and insurance of office holders in a public company must be approved by the compensation committee and the board of directors and, with respect to certain office holders or under certain circumstances, also by the shareholders. See “-Approval of Related Party Transactions under Israeli Law.”
Our articles permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to be permitted by the Companies Law.
We have obtained directors and officers liability insurance for the benefit of our office holders and intend to continue to maintain such coverage and pay all premiums thereunder to the fullest extent permitted by the Companies Law. In addition, we entered into agreements with each of our directors and executive officers exculpating them from liability to us for damages caused to us as a result of a breach of duty of care and undertaking to indemnify them, in each case, to the fullest extent permitted by our articles and the Companies Law, including with respect to liabilities resulting from a public offering of our shares, to the extent that these liabilities are not covered by insurance.
| D. | Employees |
As of December 31, 2022, we had 934 employees, with 517 located in Israel, 129 in the United States, 239 in Europe and 49 in Asia Pacific. The following table shows the breakdown of our workforce of employees and subcontractors by category of activity as of the dates indicated:
| As of December 31, | ||||||||||||
| Area of Activity | 2020 | 2021 | 2022 | |||||||||
| Service | 132 | 165 | 160 | |||||||||
| Sales and marketing | 166 | 225 | 205 | |||||||||
| Manufacturing and operations | 107 | 126 | 179 | |||||||||
| Research and development | 164 | 223 | 239 | |||||||||
| General and administrative | 103 | 143 | 151 | |||||||||
| Total | 672 | 882 | 934 | |||||||||
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With respect to our Israeli employees, Israeli labor laws govern the length of the workday and workweek, minimum wages for employees, procedures for hiring and dismissing employees, determination of severance pay, annual leave, sick days, advance notice of termination of employment, payments to the National Insurance Institute, equal opportunity and anti-discrimination laws and other conditions of employment. While none of our employees is party to any collective bargaining agreements, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are applicable to our employees in Israel by order of the Israeli Ministry of the Economy and Industry. These provisions primarily concern pension fund benefits for all employees, insurance for work-related accidents, recuperation pay and travel expenses. We generally provide our employees with benefits and working conditions beyond the required minimums. With respect to our German employees, German and European labor laws govern the common employment terms including worktime, annual leave and employment termination. In addition to that our Kornit Digital Europe GmbH have a work council. Work council must be consulted about specific employee related issues and has the right to make proposals to management according to the German Works Constitution Act (BetrVG).
We have never experienced any labor-related work stoppages or strikes and believe our relationships with our employees are good.
We have implemented an employee culture of Diversity, Equity and Inclusion, or DEI, where we seek to create a gender-equitable, welcoming and comfortable work environment in which our employees can express themselves freely and feel supported to achieve their best.
| E. | Share Ownership |
For information regarding the share ownership of our directors and executive officers, please refer to “ITEM 6.B. Compensation” and “ITEM 7.A. Major Shareholders.”
ITEM 7. Major Shareholders and Related Party Transactions.
| A. | Major Shareholders |
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of February 23, 2023 by:
| ● | each person or entity known by us to own beneficially 5% or more of our outstanding ordinary shares; | |
| ● | each of our directors and executive officers individually; and | |
| ● | all of our executive officers and directors as a group. |
The beneficial ownership of our ordinary shares is determined in accordance with the rules of the SEC and generally includes any ordinary shares over which a person exercises sole or shared voting or investment power, or the right to receive the economic benefit of ownership. For purposes of the table below, we deem ordinary shares issuable pursuant to options that are currently exercisable or exercisable within 60 days of February 23, 2023 to be outstanding and to be beneficially owned by the person holding the options for the purposes of computing the percentage ownership of that person, but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. Except where otherwise indicated, we believe, based on information furnished to us by such owners, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to such shares. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held by brokers or other nominees.
Unless otherwise noted below, each shareholder’s address is c/o Kornit Digital Ltd., 12 Ha’Amal Street, Rosh -Ha’Ayin 4809246, Israel.
A description of any material relationship that our principal shareholders have had with us or any of our predecessors or affiliates within the past three years is included under “Certain Relationships and Related Party Transactions.”
The percentages set forth below are based on 50,001,214 ordinary shares outstanding as of February 23, 2023.
Except where otherwise indicated, we believe, based on information furnished to us by such owners, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to such shares. All of our shareholders, including the shareholders listed below, have the same voting rights attached to their ordinary shares. See “ITEM 10.B Articles of Association.”
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A description of any material relationship that our major shareholders have had with us or any of our predecessors or affiliates within the past year is included under “ITEM 7.B-Related Party Transactions.”
| Name | Number of Shares Beneficially Held | Percent | ||||||
| 5% or Greater Shareholders | ||||||||
| Wasatch Advisors Inc.(1) | 4,691,897 | 9.4 | % | |||||
| Artisan Partners Limited Partnership(2) | 4,396,955 | 8.8 | % | |||||
| Granahan Investment Management, LLC(3) | 3,514,473 | 7.0 | % | |||||
| Senvest Management, LLC(4) | 4,145,259 | 8.3 | % | |||||
| Directors and Executive Officers | ||||||||
| Yuval Cohen | * | * | ||||||
| Ofer Ben-Zur | * | * | ||||||
| Lauri Hanover | * | * | ||||||
| Jae Hyun (Jay) Lee | * | * | ||||||
| Stephen Nigro | * | * | ||||||
| Yehushua (Shuki) Nir | * | * | ||||||
| Dov Ofer | * | * | ||||||
| Gabi Seligsohn | * | * | ||||||
| Ronen Samuel | 46,282 | * | ||||||
| Jecka Glasman | * | * | ||||||
| Daniel Gazit | * | * | ||||||
| Kobi Mann | * | * | ||||||
| All Directors and Executive Officers as a Group (12 persons) | * | (5) | * | |||||
| * | Represents beneficial ownership of less than 1% of our outstanding ordinary shares. |
| (1) | The address of this shareholder is 505 Wakara Way, Salt Lake City, UT 84108. The information in this row is provided as of December 31, 2022, based on an amended statement of beneficial ownership on Schedule 13G/A filed by Wasatch Advisors Inc. with the SEC on February 8, 2023. |
| (2) | The address of this shareholder is 875 E. Wisconsin Ave., Suite 800, Milwaukee, WI 53202. The information in this row is provided as of December 31, 2022, based on a statement of beneficial ownership on Schedule 13G filed by Artisan Partners Limited Partnership and related persons with the SEC on February 10, 2023. The shares reported for this shareholder have been acquired on behalf of discretionary clients of Artisan Partners Limited Partnership, or APLP, which holds 4,396,955 shares, including 2,745,314 shares on behalf of Artisan Partners Funds, Inc. |
| (3) | The address of this shareholder is 40 Wyman Street, Suite 460, Waltham, MA 02451. The information in this row is provided as of December 31, 2022, based on a statement of beneficial ownership on Schedule 13G filed by Granahan Investment Management, LLC with the SEC on February 14, 2023. All of the shares reported for this shareholder are owned by various investment advisory clients of Granahan Investment Management LLC, which is deemed to be a beneficial owner of those shares due to its discretionary power to make investment decisions over such shares and/or its ability to vote such shares (in the case of voting, with respect to 3,082,694 of such shares). |
| (4) | The address of this shareholder is 540 Madison Avenue, 32nd Floor, New York, New York 10022. The information in this row is provided as of December 31, 2022, based on an amended statement of beneficial ownership on Schedule 13G/A filed by Senvest Management, LLC with the SEC on February 10, 2023. The ordinary shares reported in this row are held in the account of Senvest Master Fund, LP and Senvest Technology Partners Master Fund, LP, which we collectively refer to as the Senvest Investment Vehicles. Senvest Management, LLC may be deemed to beneficially own the securities held by the Senvest Investment Vehicles by virtue of Senvest Management, LLC’s position as investment manager of the Senvest Investment Vehicles. Mr. Richard Mashaal may be deemed to beneficially own the securities held by the Senvest Investment Vehicles by virtue of Mr. Mashaal’s status as the managing member of Senvest Management, LLC. None of the foregoing should be construed in and of itself as an admission by any of the foregoing persons or entities as to beneficial ownership of those ordinary shares. |
| (5) | Consists of ordinary shares, and additional ordinary shares underlying options, RSUs and PSUs that may be exercised or settled (as applicable) by our directors and executive officers within 60 days of February 23, 2023. |
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Recent Significant Changes in the Percentage Ownership of Major Shareholders
In February 2021, each of Wasatch Advisors Inc. and Clal Insurance Enterprises Holdings Ltd., or Clal (a former major shareholder of ours), reported changes in its beneficial ownership that had occurred over the course of 2020, as their beneficial ownership had changed from 8.7% to 9.8%, and from 5.6% to 5.1%, respectively, over that time.
In February 2022, each of Wasatch Advisors Inc. and Clal again reported changes in its beneficial ownership that had taken place over the course of 2021, as their beneficial ownership percentages had decreased from 9.8% to 6.9%, and from 5.1% to 3.2%, respectively, over the course of 2021. Clal consequently ceased to be a 5% shareholder.
In February 2023, Wasatch Advisors Inc. reported that it had increased its beneficial ownership percentage from 6.9% to 9.4%, reflecting an increase over the course of 2022.
Each of Artisan Partners Limited Partnership, Granahan Investment Management, LLC and Senvest Management, LLC became a new 5% shareholder over the course of 2022, reporting beneficial ownership that constituted 8.8%, 7.0% and 8.3%, respectively in February 2023.
The beneficial ownership of our ordinary shares by American Capital Management Inc. (a former major shareholder) went from 6.2% as of the end of 2019 to 5.7% as of the end of 2020 to 4.1% as of the end of 2021, thereby ceasing to be a 5% shareholder at that time.
Other than the foregoing, there have been no recent significant changes in the percentage ownership of major shareholders.
Record Holders
Based upon a review of the information provided to us by our transfer agent, as of February 23, 2023, there were two holders of record of our ordinary shares, of which one record holder, holding approximately 99.93% of our outstanding ordinary shares, had a registered address in the United States. These numbers are not representative of the number of beneficial holders of our shares, nor is it representative of where such beneficial holders reside, since all of these shares held of record in the United States were held through CEDE & Co., the nominee company of the Depository Trust Company, on behalf of hundreds of firms of brokers and banks in the United States, who in turn held such shares on behalf of several thousand clients and customers.
| B. | Related Party Transactions |
Our policy is to enter into transactions with related parties on terms that, on the whole, are no more favorable, or no less favorable than those available from unaffiliated third parties. Based on our experience in the business sectors in which we operate and the terms of our transactions with unaffiliated third parties, we believe that all of the transactions described below met this policy standard at the time they occurred. The following is a description of material transactions, or series of related material transactions, since January 1, 2022, to which we were or will be a party and in which the other parties included or will include our directors, executive officers, holders of more than 10% of our voting securities or any member of the immediate family of any of the foregoing persons.
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Agreements and Arrangements with, and Compensation of, Directors and Executive Officers
Employment Agreements
We have entered into written employment agreements with each of our executive officers. These agreements provide for notice periods of varying duration for termination of the agreement by us or by the relevant executive officer, during which time the executive officer will continue to receive base salary and benefits (except for the accrual of vacation days). These agreements also contain customary provisions regarding non-competition, confidentiality of information and assignment of inventions. However, the enforceability of the non-competition provisions may be limited under applicable law.
Options, RSUs and PSUs
Since our inception we have granted options to purchase our ordinary shares to our officers and certain of our directors, and, commencing in 2018 (following approval by our shareholders), we began awarding annual RSU grants to our non-employee directors, and we also award them to our executive officers. Our option agreements may contain, and the terms of our RSU grants do contain, acceleration provisions upon certain merger, acquisition, or change of control transactions (in the case of the RSU grants, upon termination of, or resignation by, a non-employee director in connection with any such transaction or immediately thereafter). Our equity grant agreements for our officers also provide, in certain cases, for acceleration of vesting in the event of certain merger, acquisition, or change of control transactions. In 2021 and 2022, following shareholder approvals, we granted RSUs as well as performance based RSUs, or PSUs, to our chief executive officer (as described below under “Compensation Arrangement for CEO”). We describe our equity incentive plans under “ITEM 6.B. Compensation”. If the relationship between us and an executive officer or a director is terminated, except for cause (as defined in the option plans), all options that are vested will generally remain exercisable for ninety days after such termination.
Indemnification Agreements
Our articles permit us to exculpate, indemnify and insure each of our directors and office holders to the fullest extent permitted by Israeli law. We have entered into indemnification agreements with each of our directors and executive officers, undertaking to indemnify them to the fullest extent permitted by Israeli law, including with respect to liabilities resulting from a public offering of our shares, to the extent that these liabilities are not covered by insurance. We have also obtained Directors and Officers insurance for each of our executive officers and directors. For further information, see “ITEM 6.C Board Practices-Exculpation, Insurance and Indemnification of Directors and Officers.”
Compensation Arrangement for CEO
At our 2022 special general meeting of shareholders, held on December 29, 2022, our shareholders approved (following approval by our compensation committee and board of directors) an updated compensation package for our chief executive officer (the “CEO”), Ronen Samuel. We have provided below the updated compensation figures for the CEO, as adjusted based on that approval by our shareholders:
Base Salary: NIS 1.46 million (approximately $441,610)
Target Annual Bonus (% Base Salary): 100%
Target Total Cash (Base + Bonus): $883,220
Long-Term Incentive/ Equity Target Value: $2,500,000 annually
Target Total Direct Compensation: $3,383,220
The compensation package includes the following specific elements:
| (i) | Total Shareholder Return (TSR) PSUs: PSUs valued at approximately $1,250,00 are granted to the CEO annually. |
| ● | The actual number of TSR PSUs to be granted each year with the foregoing $1,250,000 value are determined based on a valuation methodology generally used for such awards (e.g., Monte Carlo method) as of the date of the relevant annual shareholder meeting or as of the relevant anniversary of the date of the meeting. |
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| ● | The vesting of the TSR PSUs is dependent upon the performance of our TSR, as measured by our Company’s share price, relative to the performance of the S&P 500 index, which determination is made for a two-year (30% weight) and three year (70% weight) period of time, upon the two-year and three-year anniversaries of each grant date, with the TSR PSUs either partially or fully vesting (if either/both performance conditions are met at or above the threshold level) or expiring (if the performance conditions are not met) on the three-year anniversary of each grant date; |
| ● | There is “double trigger” vesting and acceleration of vesting due to termination of the CEO in certain circumstances. |
| ● | The actual payout on the TSR PSUs (i.e., how many vest), will be determined based on our performance relative to a payout curve, with threshold and maximum performance levels, whereby the payout can be anywhere from zero to in excess of the payout target, as follows: |
| Kornit TSR Percentile Rank |
Payout (% of Target)* | |
| < 35th Percentile | 0% | |
| 35th Percentile | 50% (Threshold) | |
| 55th Percentile | 100% (Target)** | |
| 75th Percentile | 150% | |
| > 75th Percentile | 200% (Maximum) |
| * | Subject to linear interpolation |
| ** | Target payout requires above median performance and the applicable payout will be capped at target if our company’s absolute TSR performance for the relevant measurement period is negative, irrespective of our company’s percentile ranking for such period. |
| (ii) | RSUs: RSUs valued at approximately $625,000 are granted to the CEO annually. |
| ● | The actual number of RSUs to be granted each August 12 with the foregoing $625,000 value is based on the 30-day volume weighted average price of Kornit’s ordinary shares over the 30-day period preceding each such grant date. |
| ● | The RSUs vest over a four-year period, with 25% of the RSUs vesting upon the first anniversary of the grant date and an additional 6.25% of the RSUs vesting upon the conclusion of each of the next 12 quarters thereafter, subject to the CEO’s continuous employment. |
| ● | There is “double trigger” vesting and acceleration of vesting due to termination of the CEO in certain circumstances. |
| (iii) | Options: Options valued at approximately $625,000 (the number of options to be granted each August 12 to be determined based on the binomial pricing methodology as of the date of grant) are granted to the CEO annually. |
| ● | the options have an exercise price equal to the closing price of Kornit’s ordinary shares on the grant date; |
| ● | subject to Mr. Samuel’s continued employment as our CEO, the options vest over a four-year period, with 25% of the options vesting upon the first anniversary of the grant date and an additional 6.25% of the options vesting upon the conclusion of each of the next 12 quarters thereafter, subject to the CEO’s continuous employment; |
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| ● | There is “double trigger” vesting and acceleration of vesting due to termination of the CEO in certain circumstances; and |
| ● | The options have a ten-year term, at the conclusion of which any unexercised options would expire. |
“Clawback” Condition
The compensation terms for our CEO are subject, in the case of annual bonus and long-term incentive/equity compensation, to a potential repayment obligation to our Company/ cancellation (as applicable), under certain circumstances, as described in our compensation policy. In particular, in the event of an accounting restatement, we would be entitled to recover from the CEO a bonus payment in the amount by which it exceeds the bonus amount that would have been paid under the financial statements, as restated. In the case of performance-based equity compensation, i.e., TSR PSUs, which vest based on the performance of our share price (in comparison to the S&P 500 index companies), which itself derives in part from our reported financial results, we may cancel vested TSR PSUs to the extent that our share price following the accounting restatement drops below the level at which it minimally would have had to be in order for the TSR PSUs to have vested. If the subject TSR PSUs have been settled for underlying shares and the shares have been sold on the market already, we may seek monetary recovery to the extent the TSR PSUs would not have vested originally based on our share price following the accounting restatement.
Our right to recoup an excess payment/equity grant to our CEO applies to cash and equity incentive compensation paid during the three completed fiscal years immediately preceding the date on which we are required to prepare the accounting restatement or the CEO engaged in the misconduct. In order to recoup any such amounts, we must make a claim for recoupment prior to the second anniversary of the fiscal year end of the restated financial statements (as per the terms of our compensation policy).
Hedging/Pledging Restrictions
To ensure that the equity portion of our CEO’s compensation package serves solely to motivate our CEO to create value for our shareholders, our CEO is prohibited from creating “short” positions or engaging in other hedging activity with respect to our ordinary shares, which restrictions are based on our insider trading policy, and apply equally to our CEO. For a similar reason, our CEO will generally be prohibited from pledging the equity to be granted to him as collateral for a loan that may be received by him.
| C. | Interests of Experts and Counsel |
Not applicable.
ITEM 8. Financial Information.
| A. | Statements and Other Financial Information |
We have appended our financial statements at the end of this annual report, starting at page F-1, as part of this annual report.
Legal Proceedings
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. Currently, and in the recent past, other than as described below, we are not and have not been a party to any legal proceedings, nor are there any legal proceedings (including governmental proceedings) pending or, to our knowledge, threatened against us, that our management believes, individually or in the aggregate, would have a significant effect on our financial position or profitability. We intend to defend against any claims to which we may become subject, and to proceed with any claims that we may need to assert against third parties, in a vigorous fashion.
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Securities Class Action Lawsuits
On February 15, 2023, a securities class action complaint was filed by a shareholder of Kornit in U.S. federal court in New Jersey, naming our company, our chief executive officer, Ronen Samuel, and our former chief financial officer, Alon Rozner, as defendants. The complaint asserts claims under Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seeks unspecified damages. The complaint alleges misrepresentations by our company in our Exchange Act disclosures which caused our ordinary shares to trade at artificially inflated prices during the period between February 2021 and July 2022.
On February 17, 2023, an additional securities class action complaint was filed by a shareholder of Kornit in U.S. federal court in New Jersey, naming our company, our directors during the subject period (described below), our chief executive officer, Ronen Samuel, our former chief financial officer, Alon Rozner, the underwriters for our November 2021 follow-on public offering and Amazon (which sold shares in that public offering) as defendants. The complaint asserts claims under Sections 11, 12(a)(2) and 15 of the Securities Act, Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated under the Exchange Act, and seeks unspecified damages. The complaint alleges false and misleading statements by our company in our registration statement and prospectus supplement for the November 2021 follow-on offering and in our Exchange Act disclosures which caused our ordinary shares to be sold in that offering, and to trade in an ongoing manner, at artificially inflated prices during the period between August 2021 and July 2022.
These lawsuits are at preliminary stages. We believe the lawsuits are without merit and intend to defend against these cases vigorously. As of the date hereof, we are unable to estimate a range of loss, if any, that could result were there to be adverse final decisions in these cases, and estimated liabilities have not been recorded by the company in our financial statements.
Dividend Distribution Policy
We have never declared or paid any cash dividends on our ordinary shares. We do not anticipate paying any dividends in the foreseeable future. We currently intend (subject to any extraordinary market conditions that might arise) to retain future earnings, if any, to finance operations and expand our business. To the extent that volatile or depressed market conditions (whether in the wake of the coronavirus outbreak or otherwise) reduce the trading price of our ordinary shares substantially for an extended period of time, we may potentially consider using a portion of our cash reserves toward share repurchases. Our board of directors has sole discretion whether to pay dividends (or to effect share repurchases). If our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our directors may deem relevant. See “ITEM 3.D. Risk Factors- Risks Related to Our Ordinary Shares- We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future” and, in Exhibit 2.2 to this annual report, “Description of Kornit Digital Ltd. Ordinary Shares- Dividend and Liquidation Rights” for an explanation concerning the payment of dividends under Israeli law.
| B. | Significant Changes |
Since the date of our financial statements included in ITEM 18 of this annual report, there has not been a significant change in our company other than as described elsewhere in this annual report.
ITEM 9. The Offer and Listing.
| A. | Listing details |
Our ordinary shares have been quoted on the Nasdaq Global Select Market under the symbol “KRNT” since April 2, 2015. Prior to that date, there was no public trading market for our ordinary shares. Our IPO was priced at $10.00 per share on April 2, 2015.
On March 15, 2023, the closing sales price of our ordinary shares on the Nasdaq Global Select Market was $19.05.
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| B. | Plan of Distribution |
Not applicable.
| C. | Markets |
See “-Listing Details” above.
| D. | Selling Shareholders |
Not applicable.
| E. | Dilution |
Not applicable.
| F. | Expenses of the Issue |
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
| A. | Share Capital |
Not applicable.
| B. | Articles of Association |
The information called for by this Item 10.B of Form 20-F has been provided in Exhibit 2.2 to this annual report. The content of Exhibit 2.2 is incorporated by reference herein.
| C. | Material Contracts |
We are not party to any material contract within the two years prior to the date of this annual report, other than contracts entered into in the ordinary course of business, or as otherwise described below in this ITEM 10.C.
Agreements with Amazon
Master Purchase Agreement
On January 10, 2017, we entered into a master purchase agreement, or the Purchase Agreement, with Amazon Corporate LLC, a subsidiary of Amazon.com, Inc., or Amazon. Under the Purchase Agreement, as amended in March 2017, January 2018, and June 2018, Amazon may purchase, and we have committed to supply, AVHD6 digital direct-to-garment printers and NeoPigment ink and other consumables at agreed-upon prices which are subject to volume. We also agreed to provide maintenance services and extended warranties to Amazon at agreed-upon prices.
The Purchase Agreement provides for an “end of life” program. We are required to notify Amazon 12 months in advance if it intends to stop supporting one of the products or services supplied by us and to continue to manufacture the product or provide such service during the applicable period. Subject to certain exceptions, we are required to continue to supply ink in such quantities as Amazon requires for at least 36 months after the earlier of (1) the end of the term of the Purchase Agreement or (2) 18 months following the purchase of the last product sold pursuant to the Purchase Agreement. The Purchase Agreement requires us to make arrangements to ensure continuity of our supply of products if we do not comply with its requirements to supply the products or the services under the agreement or becomes insolvent. The Purchase Agreement also provides for penalties on a sliding scale in the case of late delivery or if our systems are unavailable for certain specific periods. There are no minimum spending commitments under the Purchase Agreement. The term of the Purchase Agreement was five years beginning on May 1, 2016 and extends automatically for additional one-year periods unless terminated by Amazon. The Purchase Agreement is subject to customary termination provisions, including material uncured breaches, insolvency or our acquisition by a competitor of Amazon. The Purchase Agreement may also be terminated by Amazon without cause subject to an agreed advance notice period.
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Original Transaction Agreement and Original Warrant
Concurrently with our execution of the Purchase Agreement, we and Amazon also entered into a transaction agreement, or the Original Transaction Agreement, pursuant to which we issued to an affiliate of Amazon a warrant, or the Original Warrant, to acquire up to 2,932,176 of our ordinary shares, or the Original Warrant Shares, at a purchase price of $13.04 per share, which is based on the preceding 30 trading day VWAP prior to the execution of the Original Transaction Agreement. The Original Warrant also provided for cashless exercise.
The Original Warrant Shares underlying the Original Warrant were subject to vesting as a function of payments for purchased products and services of up to $150 million over a five-year period, with the shares vesting incrementally each time Amazon or its affiliates made a payment totaling $5 million to us. Amazon exercised the Original Warrant on a cashless (net) exercise basis in connection with our September 2020 and November 2021 public offerings, resulting in the issuance to it, and the sale by it, of 1,689,942 and 705,953 Original Warrant Shares in those respective offerings. As of December 31, 2022, no shares remained issuable under the Original Warrant.
The Original Transaction Agreement included customary representations, warranties and covenants of our company and Amazon. The Original Transaction Agreement restricted any transfer of the Original Warrant except to a wholly owned subsidiary of Amazon and contained certain restrictions on Amazon’s ability to transfer the Original Warrant Shares, including to a beneficial owner of more than 5% of our outstanding ordinary shares, subject to customary exceptions. The Original Transaction Agreement also contained certain customary standstill restrictions with respect to an acquisition of our shares (other than an acquisition of the Original Warrant Shares), solicitation of proxies and other actions that seek to influence the control of our company. These standstill restrictions remained in effect until such time as the Original Warrant Shares held by Amazon or that remained unexercised under the Original Warrant represented less than 2% of our outstanding shares.
Under the Original Transaction Agreement, Amazon was entitled to certain registration rights with respect to Original Warrant Shares, which rights now apply to the New Warrant Shares (as described under “New Transaction Agreement and New Warrant” below). Amazon is entitled to request up to two times in any 12-month period that we file a shelf registration statement on Form F-3 or S-3, and we are required to keep the shelf registration effective for four 90-day periods. If we are ineligible to file a registration statement on Form F-3 or Form S-3, Amazon could request up to four times that we file a long form registration statement to facilitate the sale of its shares. In addition, at any time after the one year anniversary of the Original Transaction Agreement, Amazon is entitled to piggyback registration rights on underwritten offerings effected by us. We are subject to customary obligations upon Amazon’s request for registration, including cooperation in case of an underwritten offering.
As a result of Amazon’s exercise of its registration rights under the Original Transaction Agreement and its complete, cashless exercise of the Original Warrant and sale of all underlying Original Warrant Shares as part of our underwritten follow-on offerings in September 2020 and November 2021, Amazon has realized all of its rights, and we have no further material obligations to Amazon, under the Original Warrant. Please see “Underwriting Agreement for November 2021 Primary/Secondary Follow-On Offering” and “Underwriting Agreement for September 2020 Primary/Secondary Follow-On Offering” below for more information.
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New Transaction Agreement and New Warrant
On September 14, 2020, we and Amazon entered into a new transaction agreement, or the New Transaction Agreement, pursuant to which we issued to an affiliate of Amazon a warrant, or the New Warrant, to acquire up to 3,401,028 of our ordinary shares, or the New Warrant Shares, at a purchase price of $59.26 per share, which is based on the 30-trading day VWAP prior to the execution of the New Transaction Agreement. The New Warrant also provides for cashless (net) exercise.
The New Warrant Shares underlying the New Warrant are subject to vesting as a function of payments of up to an aggregate of $400 million by Amazon and its affiliates over a five-year period for two different categories of product lines and services as follows:
| Existing Product Lines and Services | New Product Lines and Services | ||||||
| Purchased Amount | $250 million | $150 million | |||||
| Maximum Number of Vesting Shares | 1,943,445 | 1,457,583 | |||||
| Number of Vesting Shares per $5 Million Payment | 38,869 | 48,587 | |||||
“Existing” products refers to any product line that has been purchased by Amazon from Kornit before the date of the issuance of the New Warrant, for example, products from the Kornit Avalanche and the Kornit Atlas printing system family and related ink and spare parts. “New” products refer to any product line that has not been purchased by Amazon before the date of the issuance of the New Warrant and may be purchased by Amazon in the future. “New” products include any future potential new applications that are printed using existing products. Neither the New Warrant nor the Purchase Agreement, as amended, contain any pricing terms or minimum purchase agreements for “New” products, and no “New” product has been qualified for use by Amazon.
The New Warrant is exercisable through the earlier of (1) January 10, 2027 and (2) the fifth anniversary of the date that all shares underlying under the Original Warrant are vested (i.e., the date on which Amazon and its affiliates have collectively made gross payments totaling $150 million to the Company or its affiliates in connection with invoices in respect of orders placed under the Purchase Agreement).
Upon the consummation of a change of control transaction (as defined in the New Warrant), subject to certain exceptions, the unvested portion of the New Warrant will vest in full and become fully exercisable.
The exercise price and the number of New Warrant Shares issuable upon exercise of the New Warrant are subject to customary anti-dilution adjustments.
The New Warrant also limits Amazon’s beneficial ownership to 4.999% of our outstanding shares unless Amazon waives this limit upon 61 days’ notice, in which case Amazon’s beneficial ownership is then limited to 9.999% of our outstanding shares.
The New Transaction Agreement includes customary representations, warranties and covenants of our company and Amazon. The New Transaction Agreement restricts any transfer of the New Warrant and New Warrant Shares issuable thereunder, except under certain circumstances set forth in the New Transaction Agreement.
Under the New Transaction Agreement, the registration rights that applied under the Original Transaction Agreement to Original Warrant Shares are deemed to apply to the New Warrant Shares as well.
The New Transaction Agreement also contains certain customary standstill restrictions with respect to an acquisition of our shares (other than an acquisition of the shares underlying the Original Warrant and the New Warrant), solicitation of proxies and other actions that seek to influence the control of our company. These standstill restrictions remain in effect until such time as the New Warrant Shares issued under the New Warrant or that remain unexercised under the New Warrant represent less than 2% of our outstanding shares.
As of December 31, 2022, 1,515,870 New Warrant Shares had vested and were issuable under the New Warrant.
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Other Material Contracts
| Material Contract | Location of Description in This Annual Report | |
| Agreements and arrangements with, and compensation of, directors and executive officers | “ITEM 7.B. Related Party Transactions-Agreements and arrangements with, and compensation of, directors and executive officers.” | |
| Kornit Digital Compensation Policy | “ITEM 6.C. Board Practices-Board Committees-Compensation Committee and Compensation Policy.” | |
| OEM Supply Agreement, dated December 3, 2015, between us and FujiFilm Dimatix, Inc. | “ITEM 3.D. Risk Factors- Risks Related to Our Business and Our Industry- Risk factor titled “If our relationships with suppliers...” | |
| Manufacturing Services Agreement, dated as of May 2015, between us and Flex | “ITEM 3.D. Risk Factors- Risks Related to Our Business and Our Industry- Risk factor titled “If our relationships with suppliers...” | |
| Manufacturing Services Agreement, dated as of February 26, 2019, between us and Sanmina-SCI Israel Medical Systems Ltd. | “ITEM 3.D. Risk Factors- Risks Related to Our Business and Our Industry- Risk factor titled “If our relationships with suppliers...” | |
| Office and Parking Space Lease Agreement, dated as of December 17, 2007 between us and Industrial Building Corporation, as amended | “ITEM 4.D. Property, Plant and Equipment.” | |
| Lease Agreement dated as of March 25, 2010 between us and Benbenisti Engineering Ltd., as amended | “ITEM 4.D. Property, Plant and Equipment.” | |
| Lease dated December 2017 between Bonanno Real Estate Group I, L.P. and Kornit Digital North America, Inc. | “ITEM 4.D. Property, Plant and Equipment.” | |
| Lease Agreement, dated as of March 27, 2022, by and between us and the Israel Lands Authority. | “ITEM 3.D. Risk Factors-Risks Related to Our Business and Our Industry- Our new Kiryat Gat facility…”. |
| D. | Exchange Controls |
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding some transactions. However, legislation remains in effect under which currency controls can be imposed by administrative action at any time.
The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not restricted in any way by our articles or by the laws of the State of Israel.
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| E. | Taxation |
Israeli Tax Considerations
The following is a brief summary of the material Israeli tax consequences concerning the ownership and disposition of our ordinary shares by our shareholders. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of such investors include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Because parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion. The discussion below is subject to change, including due to amendments under Israeli law or changes to the applicable judicial or administrative interpretations of Israeli law, which change could affect the tax consequences described below.
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders.
Israeli capital gains tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights to shares in an Israeli resident company, or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a specific exemption is available or unless a tax treaty between Israel and the seller’s country of residence provides otherwise. Capital gain is generally subject to tax at the corporate tax rate (23% in 2018 and thereafter), if generated by a company, or at the rate of 25% if generated by an individual, or 30% in the case of sale of shares by a Substantial Shareholder (i.e., a person who holds, directly or indirectly, alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, 10% or more of any of the company’s “means of control” (including, among other things, the right to receive profits of the company, voting rights, the right to receive proceeds upon liquidation and the right to appoint a director)) at the time of sale or at any time during the preceding 12-month period. Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to 47% for an individual in 2022) unless the benefiting provisions of an applicable treaty applies.
Notwithstanding the foregoing, a non-Israeli resident (individual or corporation) who derives capital gains from the sale of shares in an Israeli resident company that were purchased after the company was listed for trading on a recognized stock exchange in Israel or outside of Israel will generally be exempt from Israeli tax so long as the shares were not held through a permanent establishment that the non-Israeli resident maintains in Israel (and with respect to shares listed on a recognized stock exchange outside of Israel, so long as neither the shareholder nor the particular capital gain is otherwise subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985). However, non-Israeli corporations will not be entitled to the foregoing exemption if Israeli residents: (i) have a controlling interest of more than 25% in such non-Israeli corporation or (ii) are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. These provisions dealing with capital gain are not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
Additionally, a sale of shares by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the United States-Israel Tax Treaty, the sale, exchange or other disposition of shares of an Israeli company by a shareholder who (i) is a U.S. resident (for purposes of the treaty), (ii) holds the shares as a capital asset, and (iii) is entitled to claim the benefits afforded to such person by the treaty, is generally exempt from Israeli capital gains tax. Such exemption will not apply if: (i) the capital gain arising from such sale, exchange or disposition is attributed to real estate located in Israel; (ii) the capital gain arising from such sale, exchange or disposition is attributed to royalties; (iii) the capital gain arising from the sale, exchange or disposition that can be attributed to a permanent establishment of the shareholder that is maintained in Israel under certain terms; (iv) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting rights during any part of the 12-month period preceding such sale exchange or other disposition, subject to certain conditions; or (v) such U.S. resident is an individual and was present in Israel for a period or periods aggregating to 183 days or more during the relevant taxable year. In any such case, the sale, exchange or disposition of our ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, a U.S. resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations under U.S. law applicable to foreign tax credits. The United States-Israel Tax Treaty does not relate to U.S. state or local taxes.
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In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, such as a merger or other transaction, the ITA may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by that authority or obtain a specific exemption from the ITA to confirm their status as non-Israeli residents, and, in the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
Taxation of Non-Israeli Shareholders on Receipt of Dividends.
Non-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25% or 30% (if the recipient is a Substantial Shareholder at the time of receiving the dividend or at any time during the preceding 12 months) or 15% if the dividend is distributed from income attributed to a Benefited Enterprise and 20% with respect to a Preferred Enterprise, subject to certain conditions. Such dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares are registered with a nominee company (whether the recipient is a Substantial Shareholder or not) and 15% if the dividend is distributed from income attributed to a Benefited Enterprise or 20% if the dividend is distributed from income attributed to a Preferred Enterprise, or such reduced rate as may be provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, or such lower tax rate as may be provided in an applicable tax treaty).
For example, under the United States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the United States-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax for dividends not generated by a Benefited Enterprise and paid to a U.S. corporation holding 10% or more of the outstanding voting rights from the start of the tax year preceding the distribution of the dividend through (and including) the distribution of the dividend, is 12.5%, provided that not more than 25% of the gross income for such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, a distribution of dividends to non-Israeli residents is subject to withholding tax at source at a rate of 15% if the dividend is distributed from income attributed to a Benefited Enterprise for such U.S. corporation shareholder, provided that the condition related to our gross income for the previous year (as set forth in the previous sentence) is met. U.S. residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for United States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in U.S. tax legislation.
If the dividend is attributable partly to income derived from a Benefited Enterprise or a Preferred Enterprise, and partly from other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income.
A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed, and (iii) the taxpayer is not obligated to pay excess tax (as further explained below).
Estate and Gift Tax.
Israeli law presently does not impose estate or gift taxes.
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Excess Tax.
Individuals who are subject to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) are also subject to an additional tax at a rate of 3% on annual income exceeding NIS 663,240 for 2022, which amount is linked to the annual change in the Israeli consumer price index, including, but not limited to, dividends, interest and capital gain.
U.S. Federal Income Taxation
The following is a description of the material U.S. federal income tax consequences to U.S. Holders (as defined below) of the acquisition, ownership and disposition of our ordinary shares. This description addresses only the U.S. federal income tax consequences to purchasers of our ordinary shares and that will hold such ordinary shares as capital assets. This description does not address tax considerations applicable to holders that may be subject to special tax rules, including, without limitation:
| ● | banks, financial institutions or insurance companies; | |
| ● | real estate investment trusts, regulated investment companies or grantor trusts; | |
| ● | dealers or traders in securities, commodities or currencies; | |
| ● | tax-exempt entities; | |
| ● | certain former citizens or long-term residents of the United States; | |
| ● | persons that received our ordinary shares as compensation for the performance of services; | |
| ● | persons that will hold our ordinary shares as part of a “hedging,” “integrated” or “conversion” transaction or as a position in a “straddle” for U.S. federal income tax purposes; | |
| ● | persons owning ordinary shares in connection with a trade or business conducted outside the United States; |
| ● |
certain U.S. expatriates;
| |
| ● | partnerships (including entities classified as partnerships for U.S. federal income tax purposes) or other pass-through entities, or holders that will hold our ordinary shares through such an entity; | |
| ● | U.S. Holders (as defined below) whose “functional currency” is not the U.S. dollar; or | |
| ● | holders that own directly, indirectly or through attribution 10.0% or more of the voting power or value of our ordinary shares. |
Moreover, this description does not address the United States federal estate, gift, alternative minimum tax or net investment income tax consequences, or any state, local or non-U.S. tax consequences, of the acquisition, ownership and disposition of our ordinary shares.
This description is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, existing, proposed and temporary U.S. Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. Each of the foregoing is subject to change, which change could apply retroactively and could affect the tax consequences described below. There can be no assurances that the U.S. Internal Revenue Service will not take a different position concerning the tax consequences of the acquisition, ownership and disposition of our ordinary shares or that such a position would not be sustained.
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For purposes of this description, a “U.S. Holder” is a beneficial owner of our ordinary shares that, for U.S. federal income tax purposes, is:
| ● | a citizen or resident of the United States; | |
| ● | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any state thereof, including the District of Columbia; | |
| ● | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or | |
| ● | a trust if such trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or if (1) a court within the United States is able to exercise primary supervision over its administration and (2) one or more U.S. persons have the authority to control all of the substantial decisions of such trust. |
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds ordinary shares, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor as to its tax consequences.
You should consult your tax advisor with respect to the U.S. federal, state, local and foreign tax consequences of acquiring, owning and disposing of our ordinary shares.
Distributions
Subject to the discussion below under “- Passive Foreign Investment Company Considerations,” if you are a U.S. Holder, the gross amount of any distribution that we pay you with respect to our ordinary shares before reduction for any non-U.S. taxes withheld therefrom generally will be includible in your income as dividend income to the extent such distribution is paid out of our current or accumulated earnings and profits as determined under U.S. federal income tax principles. To the extent that the amount of any cash distribution exceeds our current and accumulated earnings and profits as determined under U.S. federal income tax principles, it will be treated first as a tax-free return of your adjusted tax basis in our ordinary shares and thereafter as capital gain. We do not expect to maintain calculations of our earnings and profits under U.S. federal income tax principles. Therefore, if you are a U.S. Holder, you should expect that the entire amount of any cash distribution generally will be reported as dividend income to you; provided, however, that distributions of ordinary shares to U.S. Holders that are part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax. Non-corporate U.S. Holders may qualify for the lower rates of taxation with respect to dividends on ordinary shares applicable to long term capital gains (i.e., gains from the sale of capital assets held for more than one year), provided that certain conditions are met, including certain holding period requirements and the absence of certain risk reduction transactions. Moreover, such reduced rate shall not apply if we are a PFIC for the taxable year in which it pays a dividend or were a PFIC for the preceding taxable year. Dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders.
If you are a U.S. Holder, subject to the discussion below, dividends that we pay you with respect to our ordinary shares will be treated as foreign source income, which may be relevant in calculating your foreign tax credit limitation. Subject to certain conditions and limitations, non-U.S. tax withheld on dividends may be deducted from your taxable income or credited against your U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends that we distribute generally should constitute “passive category income,” or, in the case of certain U.S. Holders, “general category income.” A foreign tax credit for foreign taxes imposed on distributions may be denied if you do not satisfy certain minimum holding period requirements. The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisor to determine whether and to what extent you will be entitled to this credit.
Although, as discussed above, dividends that we pay to a U.S. Holder will generally be treated as foreign source income, for periods in which we are a “United States-owned foreign corporation,” a portion of dividends paid by us may be treated as U.S. source income solely for purposes of the foreign tax credit. We would be treated as a United States-owned foreign corporation if 50% or more of the total value or total voting power of our stock is owned, directly, indirectly or by attribution, by United States persons. To the extent any portion of our dividends is treated as U.S. source income pursuant to this rule, the ability of a U.S. Holder to claim a foreign tax credit for any Israeli withholding taxes payable in respect of our dividends may be limited. Treasury Regulations that apply to taxable years beginning on or after December 28, 2021 may in some circumstances prohibit a U.S. Holder from claiming a foreign tax credit unless the taxes are creditable under the U.S.-Israel Tax Treaty and the holder is eligible for benefits under the U.S.-Israel Tax Treaty and elects its application. Holders should consult their own tax advisors about the impact of, and any exception available to, the special sourcing rule described in this paragraph, and the desirability of making, and the method of making, such an election.
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The amount of any dividend income paid in NIS will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you should not be required to recognize exchange gain or loss in respect of the dividend income. You may have exchange gain or loss if the dividend is converted into U.S. dollars after the date of receipt. Exchange gain or loss will be treated as U.S.-source ordinary income or loss.
Sale, Exchange or Other Disposition of Ordinary Shares
Subject to the discussion above under “- Passive Foreign Investment Company Considerations,” if you are a U.S. Holder, you generally will recognize an amount of gain or loss on the sale, exchange or other disposition of our ordinary shares equal to the difference between the amount realized on such sale, exchange or other disposition and your tax basis in our ordinary shares, and such gain or loss will be capital gain or loss. The tax basis in an ordinary share generally will equal the U.S. dollar cost of such ordinary share. If you are a non-corporate U.S. Holder, capital gain from the sale, exchange or other disposition of ordinary shares generally will be eligible for a preferential rate of taxation applicable to capital gains, if your holding period for such ordinary shares exceeds one year. The deductibility of capital losses for U.S. federal income tax purposes is subject to limitations under the Code. Any such gain or loss that a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes.
If an Israeli tax is imposed on the sale or other disposition of our ordinary shares, your amount realized will include the gross amount of the proceeds of the sale or other disposition before deduction of the Israeli tax. You should consult your tax adviser as to whether the Israeli tax on gains may be creditable against your U.S. federal income tax on foreign-source income from other sources.
Passive Foreign Investment Company Considerations
If we were to be classified as a “passive foreign investment company,” or PFIC, in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of U.S. federal income tax that a U.S. Holder could derive from investing in a non-U.S. company that does not distribute all of its earnings on a current basis.
A non-U.S. corporation will be classified as a PFIC for federal income tax purposes in any taxable year in which, after applying certain look through rules, either
| ● | at least 75% of its gross income is “passive income”; or; | |
| ● | at least 50% of the average quarterly value of its gross assets (which may be determined in part by the market value of our ordinary shares, which is subject to change) is attributable to assets that produce “passive income” or are held for the production of passive income; |
Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions, the excess of gains over losses from the disposition of assets which produce passive income, and includes amounts derived by reason of the temporary investment of funds raised in offerings of our ordinary shares. If a non-U.S. corporation owns at least 25% by value of the stock of another corporation, the non-U.S. corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the other corporation’s income. If we are classified as a PFIC in any year with respect to which a U.S. Holder owns our ordinary shares, our ordinary shares generally will continue to be treated as shares in a PFIC with respect to such U.S. Holder in all succeeding years during which the U.S. Holder owns our ordinary shares, regardless of whether we continue to meet the tests described above.
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Based on certain estimates of our gross income and gross assets and the nature of our business, we believe that we were not classified as a PFIC for the taxable year ended December 31, 2022, and furthermore do not expect to be classified for the taxable year ending December 31, 2023. Because PFIC status must be determined annually based on tests which are factual in nature, our PFIC status in future years will depend on our income, assets and activities in those years. In addition, because the market price of our ordinary shares is likely to fluctuate and because that market price may affect the determination of whether we will be considered a PFIC, a decline in the value of our ordinary shares may result in our becoming a PFIC. Accordingly, there can be no assurance that we will not be considered a PFIC for any taxable year and we do not intend to make a determination of our or any of our future subsidiaries’ PFIC status in the future. A U.S. Holder may be able to mitigate some of the adverse U.S. federal income tax consequences described below with respect to owning our ordinary shares if we are classified as a PFIC for our taxable year ending December 31, 2022, provided that such U.S. Holder is eligible to make, and successfully makes, either a “mark-to-market” election or a qualified electing fund election described below for the taxable year in which its holding period begins.
If we were a PFIC, and you are a U.S. Holder, then unless you make one of the elections described below, a special tax regime, which we refer to as the Excess Distribution Regime, will apply to both (a) any “excess distribution” by us to you (generally, your ratable portion of distributions in any year which are greater than 125% of the average annual distribution received by you in the shorter of the three preceding years or your holding period for our ordinary shares) and (b) any gain realized on the sale or other disposition of our ordinary shares. Under the Excess Distribution Regime, any excess distribution and realized gain will be treated as ordinary income and will be subject to tax as if (a) the excess distribution or gain had been realized ratably over your holding period, (b) the amount deemed realized in each year had been subject to tax in each year of that holding period at the highest marginal rate for such year (other than income allocated to the current period or any taxable period before we became a PFIC, which would be subject to tax at the U.S. Holder’s regular ordinary income rate for the current year and would not be subject to the interest charge discussed below), and (c) the interest charge generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in those years. Certain elections may be available that would result in an alternative treatment of our ordinary shares. If we are determined to be a PFIC, the Excess Distribution Regime described in this paragraph would also apply to indirect distributions and gains deemed to be realized by U.S. Holders in respect of any future subsidiary of ours that also may be determined to be PFICs.
If we are a PFIC for any taxable year during which a U.S. Holder holds our ordinary shares, then in lieu of being subject to the tax and interest charge rules discussed above, a U.S. Holder may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such ordinary shares are “regularly traded” on a “qualified exchange.” In general, our ordinary shares will be treated as “regularly traded” for a given calendar year if more than a de minimis quantity of our ordinary shares are traded on a qualified exchange on at least 15 days during each calendar quarter of such calendar year. Although the IRS has not published any authority identifying specific exchanges that may constitute “qualified exchanges,” Treasury Regulations provide that a qualified exchange is (a) a United States securities exchange that is registered with the SEC, (b) the United States market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or (c) a non-U.S. securities exchange that is regulated or supervised by a governmental authority of the country in which the market is located, provided that (i) such non-U.S. exchange has trading volume, listing, financial disclosure, surveillance and other requirements designed to prevent fraudulent and manipulative acts and practices, to remove impediments to and perfect the mechanism of a free and open, fair and orderly, market, and to protect investors; and the laws of the country in which such non-U.S. exchange is located and the rules of such non-U.S. exchange ensure that such requirements are actually enforced and (ii) the rules of such non-U.S. exchange effectively promote active trading of listed stocks. Our ordinary shares are listed on the Nasdaq Global Select Market, which is a United States securities exchange that is registered with the SEC. However, no assurance can be given that our ordinary shares meet the requirements to be treated as “regularly traded” for purposes of the mark-to-market election. In addition, because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the Excess Distribution Regime with respect to such holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes, including stock in any future subsidiary of ours that is treated as a PFIC.
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If a U.S. Holder makes an effective mark-to-market election, such U.S. Holder will include in each year that we are a PFIC as ordinary income the excess of the fair market value of such U.S. Holder’s ordinary shares at the end of the year over such U.S. Holder’s adjusted tax basis in our ordinary shares. Such U.S. Holder will be entitled to deduct as an ordinary loss in each such year the excess of such U.S. Holder’s adjusted tax basis in our ordinary shares over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holder will not mark-to-market gain or loss for any taxable year in which we are not classified as a PFIC. If a U.S. Holder makes an effective mark-to-market election, in each year that we are a PFIC, any gain such U.S. Holder recognizes upon the sale or other disposition of such U.S. Holder’s ordinary shares will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount of previously included income as a result of the mark-to-market election.
A U.S. Holder’s adjusted tax basis in our ordinary shares will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If a U.S. Holder makes a mark-to market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless our ordinary shares are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election. U.S. Holders are urged to consult their tax advisers about the availability of the mark-to-market election, and whether making the election would be advisable in their particular circumstances.
Where a company that is a PFIC meets certain reporting requirements, a U.S. Holder can avoid certain adverse PFIC consequences described above by making a “qualified electing fund,” or QEF, election to be taxed currently on its proportionate share of the PFIC’s ordinary income and net capital gains. Generally, a QEF election should be made on or before the due date for filing a U.S. Holder’s federal income tax return for the first taxable year in which it held our ordinary shares. If a timely QEF election is made, an electing U.S. Holder of our ordinary shares will be required to include in its ordinary income such U.S. Holder’s pro rata share of our ordinary earnings and to include in its long-term capital gain income such U.S. Holder’s pro rata share of our net capital gain, whether or not distributed. Under Section 1293 of the Code, a U.S. Holder’s pro rata share of our ordinary income and net capital gain is the amount which would have been distributed with respect to such U.S. Holder’s ordinary shares if, on each day during our taxable year, we had distributed to each holder of our ordinary shares a pro rata share of that day’s ratable share of our ordinary earnings and net capital gain for such year. In certain cases in which a QEF does not distribute all of its earnings in a taxable year, its U.S. Holders may also be permitted to elect to defer payment of some or all of the taxes on the QEF’s undistributed income but will then be subject to an interest charge on the deferred amount.
We intend to provide, upon request, all information that a U.S. Holder making a QEF election is required to obtain for U.S. federal income tax purposes (e.g., the U.S. Holder’s pro rata share of ordinary income and net capital gain), and intend to provide, upon request, a “PFIC Annual Information Statement” as described in Treasury Regulation section 1.1295-1 (or in any successor IRS release or Treasury regulation), including all representations and statements required by such statement. U.S. Holders should consult their tax advisors to determine whether any of these elections would be available and if so, what the consequences of the alternative treatments would be in their particular circumstances.
If a U.S. Holder owns our ordinary shares during any year in which we are a PFIC, the U.S. Holder generally will be required to file an IRS Form 8621 with respect to us, generally with the U.S. Holder’s federal income tax return for that year.
U.S. Holders should consult their tax advisors regarding whether we are a PFIC and the potential application of the PFIC rules.
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Disposition of Foreign Currency
Foreign currency received as dividends on our ordinary shares or on the sale or retirement of an ordinary share will have a tax basis equal to its U.S. dollar value at the time the foreign currency is received. Foreign currency that is purchased will generally have a tax basis equal to the U.S. dollar value of the foreign currency on the date of purchase. Any gain or loss recognized on a sale or other disposition of a foreign currency (including upon exchange for U.S. dollars) will be U.S. source ordinary income or loss.
Tax on Net Investment Income
A U.S. Holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from the tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. Holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and $250,000, depending on the individual’s circumstances). A U.S. Holder’s net investment income generally will include its dividends on our ordinary shares and net gains from dispositions of our ordinary shares, unless those dividends or gains are derived in the ordinary course of the conduct of trade or business (other than trade or business that consists of certain passive or trading activities). Net investment income, however, may be reduced by deductions properly allocable to that income. A U.S. Holder that is an individual, estate or trust is urged to consult its tax adviser regarding the applicability of the Medicare tax to its income and gains in respect of its investment in the ordinary shares.
Backup Withholding Tax and Information Reporting Requirements
U.S. backup withholding tax and information reporting requirements may apply to certain payments to certain holders of our ordinary shares. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, our ordinary shares made within the United States, or by a U.S. payor or U.S. middleman, to a holder of our ordinary shares, other than an exempt recipient (including a payee that is not a U.S. person that provides an appropriate certification and certain other persons). A payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, ordinary shares within the United States, or by a U.S. payor or U.S. middleman, to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. Any amounts withheld under the backup withholding rules will be allowed as a credit against the beneficial owner’s U.S. federal income tax liability, if any, and any excess amounts withheld under the backup withholding rules may be refunded, provided that the required information is timely furnished to the IRS.
Foreign Asset Reporting
Certain U.S. Holders, who are individuals, are required to report information relating to an interest in our ordinary shares, subject to certain exceptions (including an exception for shares held in accounts maintained by financial institutions). U.S. Holders are urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of our ordinary shares.
The above description is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership and disposition of our ordinary shares. You should consult your tax advisor concerning the tax consequences of your particular situation.
| F. | Dividends and Paying Agents. |
Not applicable.
| G. | Statement by Experts. |
Not applicable.
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| H. | Documents on Display |
We are currently subject to the informational requirements of the Exchange Act applicable to foreign private issuers and fulfill the obligations of these requirements by filing reports with the SEC. As a foreign private issuer, we are exempt from the rules under the Exchange Act relating to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we file with the SEC, within 120 days after the end of each subsequent fiscal year, an annual report on Form 20-F containing financial statements which will be examined and reported on, with an opinion expressed, by an independent public accounting firm. We also furnish to the SEC reports on Form 6-K containing quarterly unaudited financial information for the first three quarters of each fiscal year.
The SEC maintains an Internet website that contains reports and other information regarding issuers that file electronically with the SEC. Our filings with the SEC are also available to the public through the SEC’s website at http://www.sec.gov. As permitted under Nasdaq Listing Rule 5250(d)(1)(C), we post our annual reports filed with the SEC on our website at http://www.kornit.com. We will furnish hard copies of such reports to our shareholders upon request free of charge. The information contained on our website is not part of this or any other report filed with or furnished to the SEC.
| I. | Subsidiary Information |
Not applicable.
ITEM 11. Quantitative and Qualitative Disclosures About Market Risks.
We are exposed to a variety of financial risks, including market risk (including foreign exchange risk and price risk), credit and interest risks and liquidity risk. Our overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on our financial performance.
Foreign Currency Exchange Risk
Due to our international operations, currency exchange rates impact our financial performance. In 2022, approximately 82% of our revenues were denominated in U.S. dollars,14% of our revenues were denominated in Euros and 4% of our revenues were denominated in Great Britain Pounds. Conversely, in 2022, approximately 21% of our purchases of raw materials and components of our systems and ink and other consumables are denominated in either NIS or in NIS prices that are linked to U.S. dollars. Similarly, a majority of our operating costs, which are largely comprised of labor costs, are denominated in NIS, due to our operations in Israel. Accordingly, our results of operations may be materially affected by fluctuations in the value of the U.S. dollar relative to the NIS and the Euro.
The following table presents information about the changes in the exchange rates of the NIS and the Euro against the U.S. dollar:
| Change in Average Exchange Rate | ||||||||
| Period | U.S. Dollar against the NIS (%) | U.S. Dollar against the Euro (%) | ||||||
| 2020 | (3.4 | ) | (1.7 | ) | ||||
| 2021 | (6.2 | ) | (3.7 | ) | ||||
| 2022 | 4.0 | 12.5 | ||||||
114
The figures above represent the change in the average exchange rate in the given year compared with the average exchange rate in the immediately preceding year. Negative figures represent depreciation of the U.S. dollar compared with the NIS or Euro (as applicable) and positive figures represent appreciation of the U.S. dollar compared with the NIS or Euro (as applicable). We estimate that a 10% increase or 10% decrease in the value of the NIS against the U.S. dollar would have decreased or increased our net income by approximately $(5 million) or $6 million in 2021 and $(15.2 million) or $12.5 million in 2022, respectively. We estimate that a 10% increase or 10% decrease in the value of the Euro against the U.S. dollar would have decreased or increased our net income by approximately $(1.6 million) or $1.2 million in 2021 and $1.3 million or $(0.7 million) in 2022, respectively. These estimates of the impact of fluctuations in currency exchange rates on our historic results of operations may be different from the impact of fluctuations in exchange rates on our future results of operations since the mix of currencies comprising our revenues and expenses may change.
For purposes of our consolidated financial statements, local currency assets and liabilities are translated at the rate of exchange to the U.S. dollar on the balance sheet date and local currency revenues and expenses are translated at the exchange rate at the date of the transaction or the average exchange rate dollar during the reporting period to the United States.
To protect against an increase in the dollar-denominated value of expenses paid in NIS during the year, we have instituted a foreign currency cash flow hedging program, which seeks to hedge a portion of the economic exposure associated with our anticipated NIS-denominated expenses using derivative instruments. We intend to manage risks by using instruments such as foreign currency forward and swap contracts and other methods.
During 2021 and 2022, we entered into forward and option contracts to hedge against the risk of overall changes in future cash flow from payments of payroll and related expenses denominated in NIS.
We expect that the substantial majority of our revenues will continue to be denominated in U.S. dollars for the foreseeable future and that a significant portion of our expenses will continue to be denominated in NIS. We will continue to monitor exposure to currency fluctuations. However, we cannot provide any assurances that our hedging activities will be successful in protecting us in full from adverse impacts from currency exchange rate fluctuations. In addition, since we only plan to hedge a portion of our foreign currency exposure, our results of operations may be adversely affected due to the impact of currency fluctuations on the unhedged aspects of our operations.
Credit Risk, Liquidity Risk and Interest Rate Risk
Our investment strategy is to achieve a return that will allow us to preserve capital and maintain liquidity requirements. We invest primarily in debt securities, specifically corporate debt securities. By policy, we limit the amount of credit exposure to any one issuer. As of December 31, 2021 and December 31, 2022, we did not have any material (realized) losses on our marketable debt securities. As of December 31, 2022, unrealized losses on our marketable debt securities were partially due to temporary interest rate fluctuations as a result of higher market interest rates compared with interest rates at the time of purchase. We account for both fixed and variable rate securities at fair value with changes on gains and losses recorded in Other Comprehensive Income until the securities are sold.
Other Market Risks
We do not believe that we have any material exposure to inflationary or other market risks.
ITEM 12. Description of Securities Other than Equity Securities.
Not applicable.
115
PART II
ITEM 13. Defaults, Dividend Arrearages and Delinquencies.
None.
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
| A-E. | Not applicable |
ITEM 15. Controls and Procedures.
| (a) | Disclosure Controls and Procedures |
Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of December 31, 2022. Based on their evaluation, our principal executive officer and principal financial officer concluded that as of December 31, 2022, our disclosure controls and procedures were effective such that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
| (b) | Management annual report on internal control over financial reporting |
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; | |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Our management assessed the effectiveness of internal control over financial reporting as of December 31, 2022 based on the criteria established in “Internal Control-Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2022.
| (c) | Attestation report of the independent registered public accounting firm |
The attestation report of Kost Forer Gabbay & Kasierer, a member of EY Global, an independent registered public accounting firm in Israel, on our management’s assessment of our internal control over financial reporting as of December 31, 2022 is provided on page F-3, as included under Item 18 of this annual report.
116
| (d) | Changes in internal control over financial reporting |
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this annual report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [Reserved]
ITEM 16A. Audit Committee Financial Expert.
Our board of directors has determined that Dov Ofer, who serves on the audit committee of our board of directors and who meets the “independent director” definition under the Nasdaq Listing Rules, qualifies as an “audit committee financial expert,” as defined under the rules and regulations of the SEC.
ITEM 16B. Code of Ethics.
We have adopted a code of ethics and business conduct applicable to our executive officers, directors and all other employees. A copy of the code, as most recently updated in August 2020, is delivered to every employee of our company and is available to investors and others on our website at http://ir.kornit.com/ or by contacting our investor relations department. Under Item 16B of Form 20-F, if a waiver or amendment of the code of ethics and business conduct applies to our principal executive officer, principal financial officer, principal accounting officer, controller or other persons performing similar functions and relates to standards promoting any of the values described in Item 16B(b) of Form 20-F, we will disclose such waiver or amendment (i) on our website within five business days following the date of amendment or waiver in accordance with the requirements of Instruction 4 to such Item 16B or (ii) through the filing of a Report of Foreign Private Issuer on Form 6-K. We did not provide such a waiver or adopt such an amendment during the fiscal year ended December 31, 2022.
ITEM 16C. Principal Accountant Fees and Services.
Fees billed or expected to be billed by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global, and other members of Ernst & Young Global for professional services for each of the last two fiscal years were as follows:
| Year Ended December 31, 2021 | Year Ended December 31, 2022 | |||||||||||||||
| (in thousands of dollars) | ||||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| Audit fees | $ | 720 | 84 | % | $ | 775 | 91 | % | ||||||||
| Audit-Related Fees | - | 0 | % | - | 0 | % | ||||||||||
| Tax Fees | 76 | 9 | % | 23 | 3 | % | ||||||||||
| All Other Fees | 60 | 7 | % | 50 | 6 | % | ||||||||||
| Total | $ | 856 | 100 | % | $ | 848 | 100 | % | ||||||||
“Audit fees” are the aggregate fees billed for the audit of our annual financial statements. This category also includes services that generally the independent accountant provides, such as consents and assistance with and review of documents filed with the SEC.
“Audit-related fees” are the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit and are not reported under audit fees. These fees primarily include accounting consultations regarding the accounting treatment of matters that occur in the regular course of business, implications of new accounting pronouncements and other accounting issues that occur from time to time.
117
“Tax fees” include fees for professional services rendered by our independent registered public accounting firm for tax compliance and tax advice on actual or contemplated transactions.
“Other fees” include fees for services rendered by our independent registered public accounting firm with respect to government incentives and other matters.
Audit Committee’s Pre-approval Policies and Procedures
Our audit committee follows pre-approval policies and procedures for the engagement of our independent accountant to perform certain audit and non-audit services. Pursuant to those policies and procedures, which are designed to assure that such engagements do not impair the independence of our auditors, the audit committee pre-approves annually a catalog of specific audit and non-audit services in the categories of audit service, audit-related service and tax services that may be performed by our independent accountants.
ITEM 16D. Exemptions from the Listing Standards for Audit Committees.
Not applicable.
ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Not applicable.
ITEM 16F. Change in Registrant’s Certifying Accountant.
Not applicable.
ITEM 16G. Corporate Governance.
The Nasdaq Global Select Market requires companies with securities listed thereon to comply with its corporate governance standards. As a foreign private issuer, we are not required to comply with all of the rules that apply to listed domestic U.S. companies. Pursuant to Nasdaq Listing Rule 5615(a)(3), we have notified Nasdaq that with respect to the corporate governance practices described below, we instead follow Israeli law and practice and accordingly will not follow the Nasdaq Listing Rules. Except for the differences described below, we do not believe there are any significant differences between our corporate governance practices and those that apply to a U.S. domestic issuer under the Nasdaq corporate governance rules. However, we may in the future decide to use the foreign private issuer exemption with respect to some or all of the other Nasdaq corporate governance rules, in which case we will update our disclosure in this Item 16G of Form 20-F.
| ● | Quorum requirement for shareholder meetings: As permitted under the Companies Law, pursuant to our articles, the quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person, by proxy or by other voting instrument, who hold at least 25% of the voting power of our shares (and in an adjourned meeting, with some exceptions, two shareholders, regardless of the voting power associated with their shares), instead of 33 1/3% of the issued share capital, as required under the Nasdaq Listing Rules. |
| ● | Nomination of directors. With the exception of external directors (if applicable to us at the time) and directors elected by our board of directors due to vacancy, our directors are elected, in a staggered manner, by an annual meeting of our shareholders to hold office until the third annual meeting following their election. The nominations for directors, which are presented to our shareholders by our board of directors, are generally made by the board of directors itself, in accordance with the provisions of our articles of association and the Companies Law. Nominations need not be made by a nominating committee of our board of directors consisting solely of independent directors or otherwise, as required under the Nasdaq Listing Rules. |
ITEM 16H. Mine Safety Disclosure.
Not applicable.
ITEM 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
118
PART III
ITEM 17. Financial Statements.
Not applicable.
ITEM 18. Financial Statements.
See pages F-1 through F-48 appended hereto.
ITEM 19. Exhibits.
119
| (1) | Previously furnished to the SEC on August 12, 2021 as Exhibit 99.1 to the Registrant’s Report of Foreign Private Issuer on Form 6-K and incorporated by reference herein. |
| (2) | Previously filed with the SEC on March 10, 2015 as Exhibit 4.1 to Amendment No. 1 to the Registrant’s registration statement on Form F-1 (SEC File No. 333-202291) and incorporated by reference herein. |
| (3) | Previously filed with the SEC on March 10, 2015 as Exhibit 10.3 to Amendment No. 1 to the Registrant’s registration statement on Form F-1 (SEC File No. 333-202291) and incorporated by reference herein. |
| (4) | Previously filed with the SEC on February 25, 2015 as Exhibit 10.2 to the Registrant’s registration statement on Form F-1 (SEC File No. 333-202291) and incorporated by reference herein. |
120
| (5) | Previously filed with the SEC on March 18, 2015 as Exhibit 10.21 to Amendment No. 3 to the Registrant’s registration statement on Form F-1 (SEC File No. 333-202291) and incorporated by reference herein. |
| (6) | Previously furnished to the SEC on July 2, 2020 as Appendix A to the Registrant’s proxy statement for its 2020 annual general meeting of shareholders, attached as Exhibit 99.2 to the Registrant’s Report of Foreign Private Issuer on Form 6-K and incorporated by reference herein. |
| (7) | Previously filed with the SEC on March 25, 2021 as Exhibit 4.5 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2020 and incorporated by reference herein. |
| (8) | Previously filed with the SEC on March 25, 2021 as Exhibit 4.6 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2020 and incorporated by reference herein. |
| (9) | Previously filed with the SEC on April 14, 2016 as Exhibit 4.9 to Amendment No. 1 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2015 and incorporated by reference herein. |
| (10) | Previously filed with the SEC on March 30, 2017 as Exhibit 4.11 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2016 and incorporated by reference herein. |
| (11) | Previously filed with the SEC on March 30, 2017 as Exhibit 4.13 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2016 and incorporated by reference herein. |
| (12) | Previously filed with the SEC on March 23, 2020 as Exhibit 4.11.2 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2019 and incorporated by reference herein. |
| (13) | Previously filed with the SEC on March 23, 2020 as Exhibit 4.11.3 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2019 and incorporated by reference herein. |
| (14) | Previously filed with the SEC on March 23, 2020 as Exhibit 4.11.4 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2019 and incorporated by reference herein. |
| (15) | Previously filed with the SEC on September 14, 2020 as Exhibit 10.2 to the Registrant’s Report of Foreign Private Issuer on Form 6-K and incorporated by reference herein. |
| (16) | Previously filed with the SEC on March 25, 2021 as Exhibit 4.10.6 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2020 and incorporated by reference herein. |
| (17) | Previously filed with the SEC on March 25, 2021 as Exhibit 4.10.7 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2020 and incorporated by reference herein. |
| (18) | Previously filed with the SEC on March 30, 2017 as Exhibit 4.14 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2016 and incorporated by reference herein. |
| (19) | Previously filed with the SEC on March 30, 2017 as Exhibit 4.15 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2016 and incorporated by reference herein. |
| (20) | Previously furnished to the SEC on September 14, 2020 as Exhibit 10.1 to the Registrant’s Report of Foreign Private Issuer on Form 6-K and incorporated by reference herein. |
| (21) | Previously furnished to the SEC on September 14, 2020 as Exhibit 4.1 to the Registrant’s Report of Foreign Private Issuer on Form 6-K and incorporated by reference herein. |
| (22) | Previously filed with the SEC on March 20, 2018 as Exhibit 4.16 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2017 and incorporated by reference herein. |
| (23) | Previously filed with the SEC on March 23, 2020 as Exhibit 4.16 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2019 and incorporated by reference herein. |
| # | Filed herewith |
| † | Portions of this agreement were omitted and a complete copy of this agreement has been provided separately to the Securities and Exchange Commission pursuant to the company’s application requesting confidential treatment under Rule 406 under the Securities Act of 1933 as amended or Rule 24b-2 under the Securities Exchange Act of 1934, as amended, as applicable. |
| * | Portions of this exhibit have been omitted in accordance with the rules of the Securities and Exchange Commission. |
121
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| KORNIT DIGITAL LTD. | ||
| By: | /s/ Lauri Hanover | |
| Name: | Lauri Hanover | |
| Title: | Chief Financial Officer | |
Date: March 30, 2023
122
KORNIT DIGITAL LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
U.S. DOLLARS IN THOUSANDS
INDEX
- - - - - - - - - - - - -
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Kornit Digital Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kornit Digital Ltd. and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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 internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 30, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
| Inventory Valuation | ||
| Description of the Matter | The Company’s inventories totaled $89 million as of December 31, 2022. As explained in Note 2 to the consolidated financial statements, the Company assesses the value of all inventories, including raw materials, finished goods and spare parts, in each reporting period. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if those amounts are determined to be less than cost.
Auditing management’s estimates for excess and obsolete inventory involved subjective auditor judgment because the estimates are highly judgmental and rely on a number of factors that are affected by market and economic conditions outside the Company’s control. In particular, the obsolete and excess inventory calculations are sensitive to significant assumptions, including demand for the Company’s products and expected Company’s sales growth. | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s excess and obsolete inventory reserve process. This included management’s assessment of the assumptions and data underlying the excess and obsolete inventory valuation.
Our substantive audit procedures included, among others, evaluating the significant assumptions stated above and the accuracy and completeness of the underlying data management used to value excess and obsolete inventory. We compared the on-hand inventories levels to customer historical demand and sales forecasts, considering technological changes and introduction of new products. We also assessed the historical accuracy of management’s estimates and performed sensitivity analyses over the significant assumptions to evaluate the changes in the obsolete and excess inventory estimates that would result from changes in the underlying assumptions. |
/s/ KOST FORER GABBAY & KASIERER
A Member of EY Global
We have served as the Company’s auditor since 2012.
Tel-Aviv, Israel
March 30, 2023
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Kornit Digital Ltd.
Opinion on Internal Control over Financial Reporting
We have audited Kornit Digital Ltd and subsidiaries’ internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Kornit Digital Ltd and subsidiaries (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, 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 consolidated balance sheets of the Company as of December 31, 2022, and 2021, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated March 30, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with 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 rules and 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 reasonable assurance 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 and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection 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 of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
A Member of EY Global
March 30, 2023
F-4
KORNIT DIGITAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term bank deposits | ||||||||
| Marketable securities | ||||||||
| Trade receivables, net of allowances of $ | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current Assets | ||||||||
| Non-current Assets | ||||||||
| Marketable securities | ||||||||
| Property, plant and equipment, net | ||||||||
| Deferred tax assets, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other non-current assets | ||||||||
| Severance pay fund | ||||||||
| Total non-current Assets | ||||||||
| Total Assets | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-5
KORNIT DIGITAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands, except share and per share data
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| LIABILITIES | ||||||||
| Current Liabilities | ||||||||
| Trade payables | $ | $ | ||||||
| Employees and payroll accruals | ||||||||
| Deferred revenues and customers’ advances | ||||||||
| Operating lease liabilities | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Total current Liabilities | ||||||||
| Non-current liabilities | ||||||||
| Accrued severance pay | ||||||||
| Operating lease liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Total non-current Liabilities | ||||||||
| Total Liabilities | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Ordinary shares of NIS | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income (loss) | ( | ) | ||||||
| Retained earnings (accumulated deficit) | ( | ) | ||||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and shareholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-6
KORNIT DIGITAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands, except per share data
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Revenues | ||||||||||||
| Products | $ | $ | $ | |||||||||
| Services | ||||||||||||
| Total revenues | ||||||||||||
| Cost of revenues | ||||||||||||
| Products | ||||||||||||
| Services | ||||||||||||
| Total cost of revenues | ||||||||||||
| Gross profit | ||||||||||||
| Operating expenses | ||||||||||||
| Research and development, net | ||||||||||||
| Sales and marketing | ||||||||||||
| General and administrative | ||||||||||||
| Total operating expenses | ||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ||||||||
| Financial income, net | ||||||||||||
| Income (loss) before income taxes (tax benefit) | ( | ) | ( | ) | ||||||||
| Taxes on income (tax benefit) | ( | ) | ||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | |||||
| Basic earnings (losses) per ordinary share | $ | ( | ) | $ | $ | ( | ) | |||||
| Diluted earnings (losses) per ordinary share | $ | ( | ) | $ | $ | ( | ) | |||||
The accompanying notes are an integral part of the consolidated financial statements.
F-7
KORNIT DIGITAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
U.S. dollars in thousands
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | |||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Available-for-sale securities: | ||||||||||||
| Changes in unrealized gains (losses), net of tax | ( | ) | ( | ) | ||||||||
| Losses (gains) reclassified into net income (loss), net of tax | ( | ) | ( | ) | ||||||||
| Net change | ( | ) | ( | ) | ||||||||
| Cash flow hedges: | ||||||||||||
| Changes in unrealized gains (losses), net of tax | ( | ) | ||||||||||
| Losses (gains) reclassified into net income (loss), net of tax | ( | ) | ( | ) | ||||||||
| Net change | ( | ) | ( | ) | ||||||||
| Foreign currency translation adjustments, net | ||||||||||||
| Total other comprehensive income (loss), net of tax | ( | ) | ( | ) | ||||||||
| Comprehensive income (loss) | $ | ( | ) | $ | $ | ( | ) | |||||
The accompanying notes are an integral part of the consolidated financial statements.
F-8
KORNIT DIGITAL LTD. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS’ EQUITY
U.S. dollars in thousands, except share data
| Ordinary shares | Accumulated | Retained | ||||||||||||||||||||||
| Number of shares outstanding | Amount | Additional paid in capital | other comprehensive income (loss) | earnings (accumulated deficit) | Total Shareholders’ equity | |||||||||||||||||||
| Balance at January 1, 2020 | ||||||||||||||||||||||||
| Issuance of ordinary shares in a secondary offering, net of issuance costs in an amount of $ | ||||||||||||||||||||||||
| Exercise of options and vesting of restricted stock units | ||||||||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||||||
| Warrants to customers | - | |||||||||||||||||||||||
| Other comprehensive loss | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at December 31, 2020 | ||||||||||||||||||||||||
| Issuance of ordinary shares in a secondary offering, net of issuance costs in an amount of $ | ||||||||||||||||||||||||
| Exercise of options and vesting of restricted stock units | ||||||||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||||||
| Warrants to customers | - | |||||||||||||||||||||||
| Other comprehensive income | - | ( | ) | ( | ) | |||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance at December 31, 2021 | ||||||||||||||||||||||||
| Exercise of options and vesting of restricted stock units | ||||||||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||||||
| Warrants to customers | - | |||||||||||||||||||||||
| Other comprehensive income | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-9
KORNIT DIGITAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | |||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Fair value of warrants deducted from revenues | ||||||||||||
| Share based compensation | ||||||||||||
| Amortization of premium and accretion of discount on marketable securities, net | ||||||||||||
| Realized loss (gain) on sale of marketable securities | ( | ) | ( | ) | ||||||||
| Change in operating assets and liabilities: | ||||||||||||
| Trade receivables, net | ( | ) | ( | ) | ||||||||
| Inventories, net | ( | ) | ( | ) | ( | ) | ||||||
| Other non-current assets | ( | ) | ( | ) | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ( | ) | ||||||
| Deferred taxes | ( | ) | ||||||||||
| Operating lease right-of-use assets and liabilities, net | ( | ) | ||||||||||
| Trade payables | ( | ) | ||||||||||
| Employees and payroll accruals | ( | ) | ||||||||||
| Deferred revenues and customers’ advances | ( | ) | ( | ) | ||||||||
| Accrued expenses and other current liabilities | ||||||||||||
| Accrued severance pay, net | ( | ) | ||||||||||
| Other non-current liabilities | ( | ) | ||||||||||
| Loss from sale and disposal of property, plant and equipment | ||||||||||||
| Foreign currency translation loss on intercompany balances with foreign subsidiaries | ( | ) | ||||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchase of property, plant and equipment | ( | ) | ( | ) | ( | ) | ||||||
| Acquisition of intangible assets and capitalization of software development costs | ( | ) | ( | ) | ( | ) | ||||||
| Proceeds from sale of property, plant and equipment | ||||||||||||
| Investment in equity securities | ( | ) | ( | ) | ||||||||
| Cash paid in connection with acquisition, net of cash acquired | ( | ) | ( | ) | ( | ) | ||||||
| Proceeds from (investment in) short-term bank deposits, net | ( | ) | ( | ) | ||||||||
| Proceeds from sale of marketable securities | ||||||||||||
| Proceeds from maturity of marketable securities | ||||||||||||
| Investment in marketable securities | ( | ) | ( | ) | ( | ) | ||||||
| Net cash provided by (used in) investing activities | ( | ) | ( | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from public offering, net of issuance costs | ||||||||||||
| Exercise of employee stock options | ||||||||||||
| Payments of withholding taxes related to exercise of share-based awards | ( | ) | ( | ) | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||||||
| Foreign currency translation adjustments on cash and cash equivalents | ||||||||||||
| Increase (decrease) in cash and cash equivalents | ( | ) | ||||||||||
| Cash and cash equivalents at the beginning of the period | ||||||||||||
| Cash and cash equivalents at the end of the period | $ | $ | $ | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-10
KORNIT DIGITAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Supplemental disclosure of cash flow information | ||||||||||||
| Cash paid during the year for income taxes | $ | $ | $ | |||||||||
| Non-cash investing and financing activities: | ||||||||||||
| Purchase of property, plant and equipment | $ | $ | $ | |||||||||
| Inventory transferred to be used as property, plant and equipment | $ | $ | $ | |||||||||
| Right-of-use asset recognized with corresponding lease liability | $ | $ | $ | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-11
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL
| a. | Kornit Digital Ltd. (the “Company”) was incorporated in 2002 under the laws of the State of Israel. The Company and its subsidiaries develop, design and market digital printing solutions for the global printed textile industry. The Company’s and its subsidiaries’ solutions are based on their proprietary digital textile printing systems, ink and other consumables, associated software and value-added services. |
| b. | The Company established wholly owned subsidiaries in Israel, the United States, Germany, Hong Kong, the United Kingdom and Japan. The Company’s subsidiaries are engaged primarily in services, sales, and marketing, except for the Israeli subsidiary which is engaged primarily in research and development and manufacturing. |
| c. | The Company depends on four major suppliers to supply certain components for the production of its products. If one of these suppliers fails to deliver or delays the delivery of the necessary components, the Company will be required to seek alternative sources of supply. A change in these suppliers could result in manufacturing delays, which could cause a possible loss of sales and, consequently, could adversely affect the Company’s results of operations and financial position. |
| d. | On April 5, 2022, the Company, through its wholly owned subsidiary Kornit Digital Technologies Ltd.,
acquired |
F-12
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).
| a. | Use of estimates: |
The preparation
of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the period. The Company’s management
believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made.
Actual results could differ from those estimates.
On an ongoing basis, the Company’s management evaluates estimates, including those related to intangible assets and goodwill, tax assets and liabilities, fair values of stock-based awards, inventory write-offs, warranty provision, allowance for credit loss and provision for rebates and returns. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable. The results of the assessment form the basis for making judgments about the carrying values of assets and liabilities.
| b. | Financial statements in United States dollars: |
Most of the revenues of the Company and its subsidiaries are denominated in U.S. dollars. The U.S. dollar is the primary currency of the economic environment in which the Company and its subsidiaries operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the U.S. dollar. Accordingly, monetary accounts maintained in currencies other than the U.S. dollar are re-measured into U.S. dollars in accordance with Accounting Standards Codification (“ASC”) No. 830 “Foreign Currency Matters”. Changes in currency exchange rates between the Company’s functional currency and the currency in which a transaction is denominated are included in the Company’s statements of operations as financial income, net in the period in which the currency exchange rates change.
During the year ended December 31, 2020, the functional currency of the Company’s subsidiary in Germany was the Euro. All amounts on the balance sheet have been translated into U.S. dollars using the exchange rate in effect on the relevant balance sheet date, and all amounts in the statement of operation have been translated into U.S. dollars using the exchange rate on the respective date on which those elements are recognized. The resulting translation adjustment was reported as a component of accumulated other comprehensive income in shareholders’ equity. Management conducted a review of the functional currency of the German subsidiary and decided to change its functional currency from the EURO to the U.S. Dollars, effective January 1, 2021. This change was based on an assessment by Company’s management that the U.S. dollars is the primary currency of the economic environment in which the German subsidiary operates.
F-13
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| c. | Principles of consolidation: |
The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions, including profits from intercompany sales, have been eliminated upon consolidation.
| d. | Cash equivalents: |
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less, at acquisition.
| e. | Short-term bank deposits: |
Short-term
bank deposits are deposits with an
| f. | Marketable securities: |
The Company accounts for investments in marketable securities in accordance with ASC 320, “Investments - Debt Securities”. Management determines the appropriate classification of its investments at the time of purchase and re-evaluates such determinations at each balance sheet date. The Company classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date and the entity’s expectations of sales and redemptions in the following year.
The Company classifies all of its marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in “accumulated other comprehensive income (loss)” in shareholders’ equity. Realized gains and losses on sales of marketable securities are included in financial income, net and are derived using the specific identification method for determining the cost of securities.
The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial income, net.
At each reporting period, the Company evaluates whether declines in fair value below amortized cost are due to expected credit losses, as well as the Company’s ability and intent to hold the investment until a forecasted recovery occurs in accordance with ASC 326, Financial Instrument- Credit losses. Allowance for credit losses on available-for-sale marketable securities are recognized in the Company’s consolidated statements of operations, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in shareholders’ equity.
F-14
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company did not recognize an allowance for credit losses on marketable securities for the years ended December 31, 2022, 2021 and 2020.
| g. | Inventories: |
Inventories are measured at the lower of cost or net realizable value. The cost of inventories comprises cost of purchases and costs incurred in bringing the inventories to their present location and condition. Inventory write-off is measured as the difference between the cost of the inventory and net realizable value and is charged to cost of sales.
Cost of inventories is determined as follows:
Raw materials and components - on the basis of weighted average cost.
Finished goods - on the basis of average costs of materials, and other direct manufacturing costs.
Inventory write-offs have been provided to cover risks arising from slow-moving items, technological obsolescence and excess inventories
according to revenue forecasts.
During the
years ended December 31, 2022, 2021 and 2020, the Company recorded inventory write-offs in a total amount of $
| h. | Property, plant and equipment: |
Property, plant and equipment are measured at cost, including directly attributable costs, less accumulated depreciation and accumulated impairment losses. Depreciation is calculated on a straight-line basis over the useful life of the assets at annual rates as follows:
| % | ||||
| Office furniture and equipment | ||||
| Computer and peripheral equipment | ||||
| Machinery and equipment | ||||
| Leasehold improvements | ||||
| Building and land | ||||
| (*) |
| (**) |
F-15
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| i. | Leases: |
The Company
determines if an arrangement is a lease at inception. Contracts containing a lease are further evaluated for classification as an operating
or finance lease. In determining the leases classification the Company assesses among other criteria:
The Company uses incremental borrowing rates based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses are recognized on a straight-line basis over the lease term or the useful life of the leased asset.
In addition, the carrying amount of the ROU and lease liabilities are remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
| j. | Business combinations: |
The Company accounts for business combinations in accordance with ASC No. 805, “Business Combinations” (“ASC No. 805”). ASC No. 805 requires recognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. The excess of the fair value of the purchase price over the fair values of the identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Acquisition related costs are expensed in the statement of operations in the period incurred.
| k. | Goodwill: |
Goodwill reflects the excess of the purchase price of a business acquired over the fair value of net assets acquired. Under ASC No. 350, “Intangibles – Goodwill and other” (“ASC No. 350”), goodwill is not amortized but is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Company has elected to perform an annual impairment test of goodwill as of December 31 of each year, or more frequently if impairment indicators are present.
F-16
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company operates in
| 1. | An initial qualitative assessment may be performed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. |
| 2. | If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative fair value test is performed. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is recognized. |
During the years ended December 31, 2022, 2021 and 2020, no impairment of goodwill was recorded.
| l. | Intangible assets: |
The Company evaluates the recoverability of finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable.
The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
If such review indicates that the carrying amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. The Company has not recorded any impairment charges of finite-lived intangible assets during the years ended December 31, 2022, 2021 and 2020.
Acquired identifiable finite-lived intangible assets are amortized on a straight-line basis or accelerated method over the estimated useful lives of the assets. The basis of amortization approximates the pattern in which the assets are utilized, over their estimated useful lives.
The Company routinely reviews the remaining estimated useful lives of finite-lived intangible assets. In case the Company reduces the estimated useful life for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life.
F-17
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| m. | Impairment of long-lived assets: |
Property, plant and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360, “Accounting for the Impairment or Disposal of Long-Lived Assets”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
During the years ended December 31, 2022, 2021 and 2020, no impairment of long-lived assets and finite-lived intangible assets was recorded.
| n. | Revenue recognition: |
The Company generates revenues from sales of systems, consumables and services, including software subscriptions and transaction-based revenues. The Company sells its products directly to end-users and indirectly through independent distributors, all of whom are considered end-users.
The Company recognizes revenues in accordance with ASC No. 606, “Revenue from Contracts with Customers”. As such, the Company recognizes revenue under the core principle that transfer of control to the Company’s customers should be depicted in an amount reflecting the consideration the Company expects to receive in revenue. Therefore, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenues when, or as, the Company satisfies a performance obligation.
Revenues from products, which consist of systems and consumables, are recognized at the point in time when control has transferred, in
accordance with the agreed-upon delivery terms. Revenues from services are derived mainly from the sale of print heads, spare parts, upgrade
kits, service contracts and software subscriptions. The Company’s revenues from print heads, spare parts and upgrade kits revenues
(collectively “Spare parts”) are recognized at the point in time when control has transferred, contracts and software subscriptions
are recognized over time, on a straight-line basis, over the period of the service.
F-18
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
For multiple performance obligations arrangements, such as selling a system with service contract, installation and training, the Company accounts for each performance obligation separately as it is distinct. The transaction price is allocated to each distinct performance obligation on a relative standalone selling price (“SSP”) basis and revenue is recognized for each performance obligation when control has passed, or service has been rendered. In most cases, the Company can establish SSP based on the observable prices of services sold separately in comparable circumstances to similar customers and for products based on the Company’s best estimates of the price at which the Company would have sold the product regularly on a stand-alone basis. The Company reassesses the SSP on a periodic basis or when facts and circumstances change.
The Company does not account for training and installation as a separate performance obligation due to its immateriality in the context of its contracts. Accordingly, revenues from training and installation are recognized upon the delivery of its systems.
The Company periodically provides customer incentive programs in the form of product discounts, volume-based rebates and warrants (see also note 11f), which are accounted for as a variable consideration that are deducted from revenue in the period in which the revenue is recognized. These reductions to revenue are made based upon estimates that are determined according to historical experience and the specific terms and conditions of the incentive.
The Company maintains a provision
for returns which is estimated, primarily based on historical experience as well as management judgment, and is recorded as a reduction
of revenue. Such provision amounted to $
Contract liabilities
include amounts received from customers for which revenue has not yet been recognized. Contract liabilities amounted to $
In cases where the Company’s customers trade-in old systems as part of a sale of new systems, the fair value of the old systems is recorded as inventory, provided that such value can be recoverable.
F-19
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Revenue disaggregated by revenue source consists of the following:
Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Systems | $ | $ | $ | |||||||||
| Ink and consumables | ||||||||||||
| Service - spare parts | ||||||||||||
| Service contracts and software subscriptions | ||||||||||||
| Total revenue | $ | $ | $ | |||||||||
The following table presents revenue disaggregated by geography based on customer location:
Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| U.S. | $ | $ | $ | |||||||||
| EMEA | ||||||||||||
| Asia Pacific | ||||||||||||
| Other | ||||||||||||
| Total revenue | $ | $ | $ | |||||||||
Sales to the Company’s
independent distributors accounted for approximately
Remaining performance obligations represent contracted revenues that have not yet been recognized, and which includes deferred revenues and non-cancelable contracts that will be invoiced and recognized as revenue in future periods. The Company elected to apply the optional exemption under paragraph ASC 606-10-50-14(a) not to disclose the remaining performance obligations that relate to contracts with an original expected duration of one year or less for which deferred revenues have not been recorded yet.
The following table represents the remaining performance obligations as of December 31, 2022, which are expected to be satisfied and recognized in future periods:
| 2023 | 2024 | 2025 and thereafter | ||||||||||
| Service contracts and software subscriptions | $ | $ | $ |
F-20
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| o. | Shipping and Handling: |
Shipping and handling fees charged to the Company’s customers are recognized as revenue in the period shipped and the related costs for providing these services are recorded as a cost of revenue.
| p. | Cost of revenues: |
Cost of revenues is comprised mainly of cost of systems and parts, ink production, employees’ salaries and related costs, allocated overhead expenses, import taxes, inventory write-offs, royalties and shipping and handling fees.
| q. | Warranty costs: |
The Company typically provides assurance type standard warranty for six months on its systems including parts and labor. A provision is recorded for estimated warranty costs at the time revenues are recognized based on historical warranty costs and management’s estimates. Factors that affect the Company’s warranty liability include the number of systems, historical rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts thereof as necessary.
The following are the changes in the liability for product warranty from January 1, 2021 to December 31, 2022:
| Balance at January 1, 2021 | $ | |||
| Additions and adjustments to cost of revenues | ||||
| Reduction for payments and costs to satisfy claims | ( | ) | ||
| Balance at December 31, 2021 | $ | |||
| Additions and adjustments to cost of revenues | ||||
| Reduction for payments and costs to satisfy claims | ( | ) | ||
| Balance at December 31, 2022 | $ |
| r. | Research and development expenses, net: |
Research and development expenses, net of government grants, are charged to the statement of operations, as incurred, except for development expenses which are capitalized as described in note 2s.
F-21
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| s. | Internal use software: |
The Company
capitalizes qualifying costs incurred during the application development stage related to software developed for internal use. These costs
are capitalized based on the qualifying criteria. Such costs are amortized over the software’s estimated life of
| t. | Implementation costs incurred in cloud computing arrangement that is a service contract: |
The Company’s cloud computing arrangement (“CCA”) that is a service contract consists of an arrangement with third party vendors for internal use of their software applications that they host. The Company defers implementation costs incurred in relation to that arrangement, including costs for software application coding, configuration, integration and customization, while associated process reengineering, training, maintenance and data conversion costs are expensed. The short-term portion of deferred costs are included in prepaid expenses and other current assets in the consolidated balance sheets, while the long-term portion of deferred costs are included in other non-current assets. Amortized implementation costs incurred in CCA that are service contracts will be recognized using the straight-line method over eight years, which represents the noncancellable terms of the CCA, plus any optional renewal periods that the Company is reasonably certain to exercise. Deferred implementation costs are subject to assessment for potential impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable.
Deferred implementation costs incurred
in CCA that is a service contract amounted to $
Amortization of the implementation costs incurred in CCA that is a service contract will commence on January 1, 2023.
F-22
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| u. | Accounting for share-based compensation: |
The Company accounts for share-based compensation in accordance with ASC No. 718, “Compensation - Stock Compensation” (“ASC No. 718”) that requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the award is recognized as an expense over the requisite service periods in the Company’s consolidated statement of operations.
The Company selected the binomial option pricing model as the most appropriate fair value method for its stock options awards with the following assumptions for the years ended December 31, 2022, 2021 and 2020:
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Suboptimal exercise multiple | ||||||||||||
| Risk free interest rate | ||||||||||||
| Volatility | ||||||||||||
| Dividend yield | ||||||||||||
The expected
volatility is derived from the volatility of the Company’s share price based upon actual historical stock price movements. The computation
of the suboptimal exercise multiple is derived from empirical studies, based on those studies, the early exercise factor of public companies
is approximately
The fair value of each restricted stock unit (“RSU”) including performance based RSUs is the market value of a single ordinary share of the Company, as determined based on the closing price of the Company’s ordinary shares on the date immediately prior to the day of grant.
The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on service conditions, using the straight-line method, over the requisite service period of each of the awards. The Company recognizes forfeitures of awards as they occur.
F-23
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| v. | Derivatives and hedging: |
The Company follows FASB ASC No. 815, “Derivatives and Hedging” which requires companies to recognize all of their derivative instruments as either assets or liabilities in the balance sheets at fair value. Accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging transaction and further, on the type of hedging transaction. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. Due to the Company’s global operations, it is exposed to foreign currency exchange rate fluctuations in the normal course of its business.
The Company uses derivative financial instruments, specifically foreign currency forward and option contracts, to manage exposure to foreign currency risks, by hedging a portion of the Company’s forecasted payroll and related expenses denominated in New Israeli Shekels that it expects to incur within a year. The effect of exchange rate changes on foreign currency hedging contracts is expected to partially offset the effect of exchange rate changes on the underlying hedged item.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains or losses from contracts that were not designated as hedging instruments are recognized in “financial income, net”.
The Company measured the fair value of these contracts in accordance with ASC No. 820, “Fair Value Measurements and Disclosures” (“ASC No. 820”), and they were classified as level 2 of the fair value hierarchy.
| 1. | Derivative instruments notional amounts: |
The following table summarizes the notional amounts for hedged items:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Designated cash flow hedges | $ | $ | ||||||
| Non-designated hedges | ||||||||
| $ | $ | |||||||
F-24
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| 2. | Derivative instrument outstanding: |
As of December 31,
2022 and 2021, the fair value of the Company’s outstanding forward and option contracts amounted to $
| 3. | Derivative instrument gains and losses |
The following table sets forth the expense (income) from derivatives instruments included in the consolidated statements of operations:
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Cost of revenues | $ | $ | ( | ) | $ | ( | ) | |||||
| Research and development | ( | ) | ( | ) | ||||||||
| Sales and marketing | ( | ) | ( | ) | ||||||||
| General and administrative | ( | ) | ( | ) | ||||||||
The Company’s outstanding derivatives designated as cash flow hedging instruments and their related gains and losses, are reported in the statement of cash flows as cash flows from operating activities.
The maximum length of time over which the Company hedges its exposure to the variability in future cash flows for forecasted transactions is less than 12 months.
| w. | Advertising: |
Advertising
costs are charged to operations as incurred and were $
| x. | Income taxes: |
The Company accounts for income taxes and uncertain tax positions in accordance with ASC No. 740, “Income Taxes” (“ASC No. 740”). ASC No. 740 prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts more likely than not to be realized. Deferred tax assets and liabilities are classified as non-current assets and liabilities, respectively.
F-25
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ASC No. 740
contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax
position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely
than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related
appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than
| y. | Concentrations of credit risks: |
Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits, marketable securities, foreign exchange contracts and trade receivables.
The majority of the Company’s and its subsidiaries’ cash and cash equivalents, bank deposits and marketable securities are invested in major banks in Israel and the U.S. Generally, these cash equivalents may be redeemed upon demand and, therefore management believes that they bear a lower risk.
The Company attempts to limit its exposure to interest rate risk by investing in securities with maturities of less than four years; however, the Company may be unable to successfully limit its risk to interest rate fluctuations. At any time, a sharp rise in interest rates could have a material adverse impact on the fair value of its investment portfolio. Conversely, declines in interest rates could have a material favorable impact on the fair value of its investment portfolio. Increases or decreases in interest rates could have a material impact on interest earnings related to new investments during the period.
The trade receivables of the Company
and its subsidiaries are mainly derived from sales to customers located in the United States, Europe and Asia Pacific. The Company performs
ongoing credit evaluations of its customers. In certain circumstances, the Company may require letters of credit from its customers, other
collaterals or additional guarantees. The allowance for credit loss is based on the Company’s assessment of historical collection
experience, customer creditworthiness, and current and future economic and market conditions. The Company regularly reviews the adequacy
of the allowance for credit loss based on a combination of factors, including an assessment of the current customer’s aging balance,
the nature and size of the customer and the financial status of the customer. Accounts receivable deemed uncollectable are charged against
the allowance for credit loss when identified. The allowance for credit loss as of December 31, 2022 and 2021, amounted to $
| z. | Transfers of financial assets: |
ASC 860 “Transfers and Servicing”, (“ASC 860”), establishes a standard for determining when a transfer of financial assets should be accounted for as a sale. The Company’s arrangements are such that the underlying conditions are met for the transfer of financial assets to qualify for accounting as a sale. The transfers of financial assets are typically performed by the factoring of receivables to two financial institutions.
F-26
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
For the year
ended December 31, 2022, and 2021, the Company sold trade receivables to financial institutions in a total net amount of $
| aa. | Severance pay: |
The Company’s
employees in Israel have subscribed to Section 14 of Israel’s Severance Pay Law, 5723-1963 (“Section 14”). Pursuant
to Section 14, the Company’s employees, covered by this section, are entitled only to monthly deposits, at a rate of
With regards to employees in Israel that are not subject to Section 14, the Company’s liability for severance pay is calculated pursuant to the Severance Pay Law, based on the most recent salary of the relevant employees multiplied by the number of years of employment as of the balance sheet date. These employees are entitled to one-month salary for each year of employment or a portion thereof. The Company’s liability for these employees is fully provided for via monthly deposits with severance pay funds, insurance policies and an accrual. The value of these deposits is recorded as an asset on the Company’s balance sheet.
The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to the Severance Pay Law or labor agreements.
Severance
expenses for the years ended December 31, 2022, 2021 and 2020 were $
| ab. | Fair value of financial instruments: |
The Company applies ASC No. 820. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches. ASC No. 820 establishes a hierarchy for inputs used in measuring fair value that maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
F-27
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The hierarchy is broken down into three levels based on the inputs as follows:
| Level 1 - | Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date. | |
| Level 2 - | Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. | |
| Level 3 - | Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The carrying amount of cash, cash equivalents, short term bank deposits, trade receivables, prepaid expenses and other current assets, trade payables and accrued expenses and other current liabilities approximates their fair value due to the short-term maturities of such instruments.
The Company measures its marketable securities and foreign currency derivative instruments at fair value. Marketable securities and foreign currency derivative instruments are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
| ac. | Basic and diluted earnings (losses) per share: |
Basic earnings No. 260, “Earnings Per Share” is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted earnings per share is computed based on the weighted average number of ordinary shares outstanding during each period, plus dilutive potential ordinary shares considered outstanding during the period, in accordance with the relevant ASC.
For the years ended December 31, 2022 and 2020, all outstanding options and RSU’s have been excluded from the calculation of the diluted earnings per share since their effect was anti-dilutive.
The total number
of shares related to the outstanding options and RSU’s excluded from the calculation of diluted earnings (losses) per share due
to their anti-dilutive effect was
| ad. | Restructuring: |
During the year ended December 31, 2022, the Company initiated several measures to pursue greater cost efficiency and to realign its business and strategic priorities.
F-28
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
During 2022,
the Company announced a workforce reduction of approximately
The Company substantially completed these actions by the end of 2022.
A summary of the restructuring charges for the year ended December 31, 2022 by major activity type is as follows:
| Severance and other personnel costs | Others | Total | ||||||||||
| Cost of product revenues | $ | $ | $ | |||||||||
| Cost of service revenues | ||||||||||||
| Research and development, net | ||||||||||||
| Sales and marketing | ||||||||||||
| General and administrative | ||||||||||||
| $ | $ | $ | ||||||||||
The liabilities
related to the restructuring plan as of December 31, 2022 amounted to $
| ae. | New accounting pronouncement, not yet adopted |
The Company has reviewed recent accounting pronouncements and concluded that they are either not applicable to its business or that no material effect is expected on the consolidated financial statements as a result of their future adoption.
NOTE 3:- ACQUISITIONS
| a. | Custom Gateway: |
On August 7,
2020, the Company, through its wholly owned subsidiary Kornit Digital United Kingdom, acquired all the outstanding shares of Custom Gateway,
a leading global provider of cloud-based software workflow solutions for both B2B and B2C business models. Under the related acquisition
agreement, the total consideration was $
Custom Gateway offers a cloud-based platform that enables content sourcing, creation, management and display at the front end. An order management system captures orders and uses proprietary algorithms to direct them to the appropriate production site. On the production floor, orders are routed and managed to facilitate efficient on-demand production on a mass scale. The technology enables customers to realize the full efficiency, scalability and profitability benefits of digitization by seamlessly connecting the front end, whether online or storefront, to the most suitable back-end element, such as on-demand production and logistics operations.
F-29
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- ACQUISITIONS (Cont.)
The Company believes this acquisition will strategically accelerate its broad-scale development effort and strengthen its value proposition for brands, retailers and fulfillers in the area of digital transformation. The Company expects the combination of the Custom Gateway software workflow portfolio with its existing and future technologies to bring to the market an end-to-end solution for on-demand production.
The purchase price allocation for the acquisition has been determined as follows:
Fair value | ||||
| Tangible assets (liabilities): | ||||
| Cash | $ | |||
| Account receivables and other receivables | ||||
| Property and equipment | ||||
| Trade payables and other payables | ( | ) | ||
| Deferred tax liabilities, net | ( | ) | ||
| Intangible assets: | ||||
| Technology | ||||
| Non-competition | ||||
| Goodwill | ||||
| Total purchase price | $ | |||
Pro forma results of operations related to this acquisition have not been prepared because the acquisition was not material to the Company’s consolidated statements of operations.
| b. | Voxel8 Inc. |
On August 10, 2021, the Company consummated
the acquisition, pursuant to an asset purchase agreement, of certain assets of Voxel8 Inc., an advanced additive manufacturing technology
for textiles, which allows for digital fabrication of functional features with zonal control of material properties, in addition to utilizing
high-performance elastomers adhering to inkjet technology. Under the agreement, the Company’s U.S. subsidiary purchased the associated
assets for a total consideration of $
In addition, the Company incurred
acquisition-related costs in a total amount of $
The main reasons for this acquisition were to strengthen the Company’s ability to explore potential existing and new lucrative markets such as functional apparel and footwear, as well as to be able to offer versatility of decorative capabilities enabling the production of various functional applications on textile substrates.
F-30
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- ACQUISITIONS (Cont.)
The Voxel8 acquisition was accounted for as a business combination in accordance with ASC 805 “Business Combinations”. Under business combination accounting principles, the total purchase price was allocated to Voxel8’s net tangible and intangible assets based on their estimated fair values as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill, which is deductible for tax purposes.
The following table summarizes the purchase price allocation for Voxel8 Acquisition:
| Fair value | ||||
| Tangible assets, net | $ | |||
| Intangible assets: | ||||
| Technology - materials | ||||
| Technology - systems | ||||
| License | ||||
| Goodwill | ||||
| Total purchase price | $ | |||
Pro forma results of operations related to this acquisition have not been prepared because the acquisition was not material to the Company’s consolidated statements of operations.
| c. | Tesoma GmbH: |
On April 5, 2022, the Company,
through its wholly owned subsidiary Kornit Digital Technologies, acquired all of the outstanding shares of Tesoma GmbH, a German manufacturer
of continuous dryers and oven systems. Under the related acquisition agreement, the total consideration was $
Tesoma generates revenues from several markets, including textile, mechanical engineering and automotive.
The Company believes this acquisition will accelerate its value proposition for fulfillers in the area of dryers for the textile industry.
F-31
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- ACQUISITIONS (Cont.)
The Tesoma acquisition was accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) 805 “Business Combinations”. ASC 805 requires recognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. The excess of the fair value of the purchase price over the fair values of the identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Acquisition related costs are expensed to the statement of operations in the period incurred.
The following table summarizes the purchase price allocation of Tesoma Acquisition:
Fair value | Amortization period (years) | |||||||
| Tangible assets (liabilities): | ||||||||
| Cash | $ | |||||||
| Accounts receivable and other receivables | ||||||||
| Inventory | ||||||||
| Property and equipment | ||||||||
| Other assets | ||||||||
| Advance from customers | ( | ) | ||||||
| Trade payables | ( | ) | ||||||
| Provisions and other liabilities | ( | ) | ||||||
| Deferred tax liabilities, net | ( | ) | ||||||
| Net assets | ||||||||
| Intangible assets: | ||||||||
| Customer Relationship | ||||||||
| Technology | ||||||||
| Backlog | ||||||||
| Goodwill | ||||||||
| Total purchase price | $ | |||||||
Goodwill is primarily attributable to expected synergies arising from technology integration and expanded product availability to the Company’s existing and new customers. Goodwill is not deductible for income tax purposes.
Pro-forma results of operations related to this acquisition have not been prepared because they are not material to the Company’s consolidated statements of operations.
F-32
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:- MARKETABLE SECURITIES
The following is a summary of marketable securities held as of December 31, 2022 and 2021:
| December 31, 2022 | ||||||||||||||||
Amortized cost | Gross unrealized gain | Gross unrealized loss | Fair value | |||||||||||||
| Matures within one year: | ||||||||||||||||
| Corporate debentures | $ | $ | $ | ( | ) | $ | ||||||||||
| Government debentures | ( | ) | ||||||||||||||
| ( | ) | |||||||||||||||
| Matures after one through four years: | ||||||||||||||||
| Corporate debentures | ( | ) | ||||||||||||||
| Government debentures | ( | ) | ||||||||||||||
| ( | ) | |||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2021 | ||||||||||||||||
Amortized Cost | Gross unrealized gain | Gross unrealized loss | Fair value | |||||||||||||
| Matures within one year: | ||||||||||||||||
| Corporate debentures | $ | $ | $ | $ | ||||||||||||
| Government debentures | ||||||||||||||||
| Matures after one through four years: | ||||||||||||||||
| Corporate debentures | ( | ) | ||||||||||||||
| Government debentures | ( | ) | ||||||||||||||
| ( | ) | |||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
F-33
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:- MARKETABLE SECURITIES (Cont.)
Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values, were as follows as of December 31, 2022 and 2021:
| December 31, 2022 | ||||||||||||||||||||||||
| Less than 12 months | More than 12 months | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||
| Corporate debentures | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Government debentures | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||
| Less than 12 months | More than 12 months | Total | ||||||||||||||||||||||
Fair value | Unrealized Losses | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||
| Corporate debentures | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Government debentures | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
F-34
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:- FAIR VALUE MEASUREMENTS
The table below sets forth the Company’s assets and liabilities that were measured at fair value as of December 31, 2022 and 2021 by level within the fair value hierarchy.
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||||
| Short-term bank deposits | ||||||||||||||||
| Marketable securities | $ | |||||||||||||||
| Total financial assets | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign currency derivative contracts | $ | ( | ) | $ | ( | ) | ||||||||||
| December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
| Short-term bank deposits | ||||||||||||||||
| Marketable securities | ||||||||||||||||
| Foreign currency derivative contracts | ||||||||||||||||
| Total financial assets | $ | $ | $ | $ | ||||||||||||
F-35
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:- INVENTORIES, NET
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Raw materials and components | $ | $ | ||||||
| Finished goods (*) | ||||||||
| $ | $ | |||||||
| (*) |
NOTE 7:- PROPERTY, PLANT AND EQUIPMENT, NET
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cost: | ||||||||
| Computer and peripheral equipment | $ | $ | ||||||
| Office furniture and equipment | ||||||||
| Machinery and equipment | ||||||||
| Leasehold improvements | ||||||||
| Building and land | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Depreciation
expenses for the years ended December 31, 2022, 2021 and 2020 were $
F-36
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 8:- INTANGIBLE ASSETS, NET
| a. | Intangible assets are comprised of the following: |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Original amount: | ||||||||
| Acquired technology | $ | $ | ||||||
| License | ||||||||
| Customer relationships | ||||||||
| Non-competition agreement | ||||||||
| Software development costs | ||||||||
| Distribution rights | ||||||||
| $ | $ | |||||||
| Accumulated amortization: | ||||||||
| Acquired technology | ||||||||
| License | ||||||||
| Customer relationships | ||||||||
| Non-competition agreement | ||||||||
| Software development costs | ||||||||
| Distribution rights | ||||||||
| Intangible assets, net | $ | $ | ||||||
Amortization
expenses for the years ended December 31, 2022, 2021 and 2020 were $
| b. | Amortization expenses for future periods are as shown below: |
| Years ending December 31, | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 and thereafter | ||||
| $ | ||||
F-37
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- ACCRUED EXPENSES AND OTHER PAYABLES
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Accrued expenses | $ | $ | ||||||
| Government authorities | ||||||||
| Warranty provision | ||||||||
| Provision for returns | ||||||||
| Professional services | ||||||||
| $ | $ | |||||||
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES
| a. | Charges: |
As of December
31, 2022, the Company had a line of credit with an Israeli bank for total borrowings of up to
| b. | Purchase commitments: |
As of December 31,
2022, the Company had $
| c. | Litigation: |
From time to time, the Company is party to various legal proceedings, claims and litigation that arise in the normal course of business. It is the opinion of management that the ultimate outcome of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
| d. | Royalty Commitments: |
Under the Company’s
agreement for purchasing print heads and other products, which was amended in 2016, the Company is obligated to pay
Royalties expenses
for each of the years ended December 31, 2022, 2021 and 2020 were $
| e. | Guarantees: |
As of December
31, 2022, the Company provided five bank guarantees in a total amount of $
F-38
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- SHAREHOLDERS’ EQUITY
| a. | Company’s shares: |
| 1. | Ordinary shares: |
Any ordinary share confers equal rights to dividends and bonus shares and to participate in the distribution of surplus assets upon liquidation in proportion to the par value of each share regardless of any premium paid thereon, all subject to the provisions of the Company’s articles of association. Each ordinary share confers its holder the right to participate the general meetings of the shareholders of the Company, with one vote on any matter presented to the shareholders.
| 2. | On September 16, 2020, the Company closed a follow-on offering that had a secondary component. In the
offering, the Company issued and sold to the public |
| 3. | On November 19, 2021, the Company closed a follow-on offering where |
| b. | Share option and RSU’s plans: |
The Company’s
Board of Directors has approved equity incentive plans pursuant to which the Company is authorized to issue to employees, directors and
officers of the Company and its subsidiaries (the “optionees”) options to purchase ordinary shares of the company, at an exercise
price equal to at least the fair market value of the ordinary shares at the date of grant.
Under the company equity incentive plans, beginning in 2017, the Company grants RSU’s, including performance-based RSUs. The RSU’s generally vest over a period of four years of employment and performance-based RSU’s vest also based on performance targets. RSU’s that are cancelled or forfeited become available for future grants.
F-39
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- SHAREHOLDERS’ EQUITY (Cont.)
During December
2022, the Company’s board of directors approved a decrease of
| c. | A summary of the Company’s share option activity and related information is as follows: |
Number of shares upon exercise | Weighted average exercise price | Weighted- average remaining contractual term (in years) | Aggregate intrinsic value | |||||||||||||
| Outstanding at beginning of year | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Outstanding at end of year | $ | $ | ||||||||||||||
| Exercisable at end of year | $ | $ | ||||||||||||||
As of December
31, 2022, the Company had $
The weighted
average fair value of options granted during the years ended December 31, 2022, 2021 and 2020 was $
| d. | A summary of the Company’s RSU’s activity is as follows: |
| Number of RSUs | ||||
| Unvested at beginning of year | ||||
| Granted | ||||
| Vested | ( | ) | ||
| Forfeited | ( | ) | ||
| Unvested at the end of the year | ||||
The weighted average fair value at
grant date of RSU’s granted for the years ended December 31, 2022, 2021 and 2020 was $
F-40
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- SHAREHOLDERS’ EQUITY (Cont.)
The weighted
average fair value of RSU’s vested during the years ended December 31, 2022, 2021 and 2020 was $
As of December
31, 2022, the Company had $
| e. | The following table sets forth the total share-based compensation expense included in the consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020: |
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Cost of products | $ | $ | $ | |||||||||
| Cost of services | ||||||||||||
| Research and development, net | ||||||||||||
| Sales and marketing | ||||||||||||
| General and administrative | ||||||||||||
| Total share-based compensation expenses | $ | $ | $ | |||||||||
| f. | On
January 10, 2017, the Company signed a master purchase agreement with Amazon Inc. under which |
F-41
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- SHAREHOLDERS’ EQUITY (Cont.)
On September 14, 2020, the Company
signed an amendment to the master purchase agreement with Amazon Inc. under which an additional
The fair value of the warrants was
measured on the grant date using the Monte Carlo simulation with assumptions of risk-free rate of
The Company recognized a reduction
to revenues of $
NOTE 12:- EARNINGS (LOSSES) PER SHARE
The following table sets forth the computation of basic and diluted earnings (losses) per share:
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Numerator for basic and diluted earnings (losses) per share: | ||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | |||||
| Weighted average ordinary shares outstanding: | ||||||||||||
| Denominator for basic earnings (losses) per share | ||||||||||||
| Effect of dilutive securities: | ||||||||||||
| Employee share options, RSUs, PSUs and Warrants | ||||||||||||
| Denominator for diluted earnings (losses) per share | ||||||||||||
| Basic earnings (losses) per share | $ | ( | ) | $ | $ | ( | ) | |||||
| Diluted earnings (losses) per share | $ | ( | ) | $ | $ | ( | ) | |||||
F-42
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes, for the year ended December 31, 2022:
Unrealized Gains | Unrealized Gains | Foreign currency translation adjustment | Total | |||||||||||||
| Beginning balance | $ | ( | ) | $ | $ | $ | ||||||||||
| Other comprehensive income before reclassifications | ( | ) | ( | ) | ( | ) | ||||||||||
| Amounts reclassified from accumulated other comprehensive income | ||||||||||||||||
| Net current period other comprehensive income | ( | ) | ( | ) | ( | ) | ||||||||||
| Ending Balance | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
NOTE 14:- LEASES
The Company’s leases include offices and warehouses for its facilities worldwide, as well as car leases, which are all classified as operating leases. Certain leases include renewal options that are subject to the Company’s sole discretion. The renewal options were included in the right of use (“ROU”) and liability calculation if it was reasonably certain that the Company will exercise the option.
The components of lease expenses for the years ended December 31, 2022, 2021 and 2020 were as follows:
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Operating lease | $ | $ | $ | |||||||||
| Short-term lease | ||||||||||||
| Total lease expense | $ | $ | $ | |||||||||
Cash
paid for amounts included in the measurement of operating lease liabilities was $
The Company’s operating lease
agreements have remaining lease terms ranging from one to eight years.
As of December
31, 2022, the weighted average remaining lease term is approximately
F-43
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- LEASES (Cont.)
Maturities of operating lease liabilities as of December 31, 2022 were as follows:
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total operating lease payments | $ | |||
| Less - imputed interest | ( | ) | ||
| Present value of future lease payments | $ | |||
As of December 31, 2022 the Company has entered into operating lease agreements that have not yet commenced with estimated lease obligations of approximately $8 million. These operating lease agreements will commence in 2023 with a lease term of up to ten years, including an option for a five-year extension.
NOTE 15:- TAXES ON INCOME
| a. | Tax rates: |
Taxable income
of the Company and its Israeli subsidiary is subject to Israeli corporate tax at the rate of
| b. | Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Law”): |
The Company’s production facilities in Israel have been granted “Beneficiary Enterprise” status under the Law. The Company and its Israeli subsidiary have been granted benefits under the “Alternative Benefit Track” under which the main benefits are a tax exemption for undistributed income and a reduced tax rate.
The Company and its Israeli subsidiary began to utilize such tax benefits in 2010. The entitlement to the above benefits was limited to the end of 2019, and was conditional upon the Company and its Israeli subsidiary fulfilling the conditions stipulated by the Law and related regulations. In the event of failure to comply with these conditions, the benefits may be partially or fully canceled and the Company or its Israeli subsidiary may be required to refund the amount of the benefits, in whole or in part, plus a consumer price index linkage adjustment and interest.
In the event of distribution of any dividends, the amount distributed which is allocated to the above-mentioned tax-exempt income, on a prorate basis, will be subject to the same reduced corporate tax rate that would have been applied to the Beneficiary Enterprise’s income.
F-44
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- TAXES ON INCOME (Cont.)
In addition, tax-exempt income attributed to the Beneficiary Enterprise will subject the Company to taxes upon distribution in any manner including complete liquidation.
On November 15, 2021,
a new amendment of the Law was enacted harshening the rules with respect to determining the profits from which a dividend was distributed
and providing that part of any dividend distribution will be deemed as distributed from the Trapped Profits, according to a certain formula.
The Israeli government agreed to grant relief of
The partial
corporate income tax relief was available to companies that elected to implement the temporary reduced tax relief by November 15, 2022
in respect of its exempt retained earnings, provided that up to
During November 2022, the Company
applied the Temporary Order to its exempt profits accrued prior to 2022 by the Company and its Israeli subsidiary. Consequently, the Company
paid of $
The Company’s Israeli subsidiary
elected to apply the Preferred Enterprise regime under the January 2011 amendment to the Law as of the 2013 tax year. The election is
irrevocable. Under the Preferred Enterprise regime, a preferred income of an Enterprise located in the center of Israel is subject to
the tax rate of
F-45
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- TAXES ON INCOME (Cont.)
The 2017 Amendment provides that a technology
company satisfying certain conditions will qualify as a Preferred Technology Enterprise and will thereby enjoy a reduced corporate tax
rate of
Dividends distributed
by a Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source at the
rate of
The Company and
its Israeli subsidiary believe they meet the conditions for “Preferred Technological Enterprises”, and are subject to a tax
rate of
From time to time, the Israeli Government discusses reducing the benefits available to companies under the Law. The termination or substantial reduction of any of the benefits available under the Law could materially increase the Company’s tax liabilities.
| c. | Tax benefits under the Israeli Law for the Encouragement of Industry (Taxation), 1969: |
Each of the Company and its Israeli subsidiary is an “Industrial Company” as defined by the Israeli Law for the Encouragement of Industry (Taxation), 1969, and, as such, is entitled to certain tax benefits including accelerated depreciation, deduction of public offering expenses in three equal annual installments and amortization of other intangible property rights for tax purposes. In addition, these Israeli companies are eligible to submit consolidated tax returns, allowing the offsetting of losses between the entities.
| d. | Income taxes of non-Israeli subsidiaries: |
The Company’s non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of residence.
F-46
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- TAXES ON INCOME (Cont.)
Taxes were not provided for undistributed earnings of the Company’s foreign subsidiaries. The Company’s board of directors has determined that the Company does not currently intend to distribute any amounts of its undistributed earnings as a dividend. The Company intends to reinvest these earnings indefinitely in the foreign subsidiaries. Accordingly, no deferred income taxes have been provided. If these earnings were distributed into Israel in the form of dividends or otherwise, the Company would be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.
The amount
of undistributed earnings of foreign subsidiaries that are considered to be reinvested as of December 31, 2022 was $
| e. | Tax assessments: |
The Company and its Israeli subsidiary received final tax assessments through 2021. The U.S subsidiary, Tesoma GmbH and German subsidiary received final tax assessments through 2018, 2019 and 2020, respectively, and the Hong Kong, Japan and U.K subsidiaries have not received a final tax assessment since inception.
| f. | Carryforward losses for tax purposes: |
As of December
31, 2022, the Company and its Israeli subsidiary have carryforward tax losses of approximately $
As of December
31, 2022, Custom Gateway Ltd has carryforward tax losses of approximately $
As of December
31, 2022, Kornit Digital UK Ltd has carryforward tax losses of approximately $
As of December
31, 2022, Tesoma GmbH has carryforward tax losses of approximately $
F-47
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- TAXES ON INCOME (Cont.)
| g. | Deferred income taxes: |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s and its subsidiaries’ deferred tax liabilities and assets are as follows:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Deferred tax assets: | ||||||||
| Carryforward tax losses | $ | $ | ||||||
| Share-based compensation expenses | ||||||||
| Research and development carryforward expenses | ||||||||
| Allowance and other reserves | ||||||||
| Operating lease liabilities | ||||||||
| Total gross deferred tax assets | ||||||||
| Less, Valuation Allowance | ( | ) | ||||||
| Total deferred tax assets | ||||||||
| Deferred tax liabilities: | ||||||||
| Operating lease ROU assets | ( | ) | ( | ) | ||||
| Intangible assets | ( | ) | ( | ) | ||||
| Others | ( | ) | ( | ) | ||||
| Total gross deferred tax liabilities | ( | ) | ( | ) | ||||
| Net deferred tax assets (liabilities) | $ | ( | ) | $ | ||||
In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the available evidence, management believes that it is more likely than not that its deferred tax assets will not be realized and accordingly, a valuation allowance has been provided.
Income (loss) before income taxes is comprised as follows:
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Domestic | $ | ( | ) | $ | $ | ( | ) | |||||
| Foreign | ||||||||||||
| Income (loss) before income taxes | $ | ( | ) | $ | $ | ( | ) | |||||
F-48
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- TAXES ON INCOME (Cont.)
| h. | Taxes on income (tax benefits) are comprised as follows: |
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Current taxes | $ | $ | ( | ) | $ | |||||||
| Deferred taxes | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||
| Domestic | $ | $ | $ | |||||||||
| Foreign | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Domestic taxes: | ||||||||||||
| Current taxes | $ | $ | ( | ) | $ | |||||||
| Deferred taxes | ||||||||||||
| Foreign taxes: | ||||||||||||
| Current taxes | ||||||||||||
| Deferred taxes | ( | ) | ( | ) | ||||||||
| ( | ) | |||||||||||
| Taxes on income | $ | $ | ( | ) | $ | |||||||
| i. | Uncertain tax positions: |
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Beginning of year | $ | $ | ||||||
| Additions related to tax positions taken during current year | ||||||||
| Reduction related to settlements of tax matters | ( | ) | ||||||
| Reductions for tax positions of prior years | ( | ) | ( | ) | ||||
| Balance at December 31(*) | $ | $ | ||||||
| (*) |
F-49
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- TAXES ON INCOME (Cont.)
The amount of the unrecognized tax benefits could affect the Company’s income tax provision and the effective tax rate.
Exchange rate differences are recorded within financial income, net, while interest is recorded within income tax expense.
The final tax outcome of the Company’s tax audits could be different from that which is reflected in the Company’s income tax provisions and accruals. Such differences could have a material effect on the Company’s income tax provision and net income in the period in which such determination is made.
| j. | A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company and the actual tax expense as reported in the statement of operations is as follows: |
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Income (loss) before taxes, as reported in the consolidated statements of operations | $ | ( | ) | $ | $ | ( | ) | |||||
| Theoretical tax expense (benefit) at the Israeli statutory tax rate | ( | ) | ( | ) | ||||||||
| Beneficiary enterprise expenses (benefit) | ( | ) | ( | ) | ||||||||
| Tax adjustment in respect of different tax rate of foreign subsidiaries | ( | ) | ||||||||||
| Non-deductible expenses and other permanent differences | ( | ) | ( | ) | ( | ) | ||||||
| Share based compensation | ||||||||||||
| Increase (decrease) in other uncertain tax positions, net | ( | ) | ( | ) | ||||||||
| Taxes related to prior years (see also note 15b) | ||||||||||||
| Losses and timing differences for which valuation allowance was provided | ||||||||||||
| Others | ( | ) | ( | ) | ||||||||
| Actual tax expense (benefit) | $ | $ | ( | ) | $ | |||||||
F-50
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- GEOGRAPHIC INFORMATION
Summary information about geographic areas:
The Company operates in one reportable segment (see note 1 for a brief description of the Company’s business). Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the Company’s chief executive officer, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis.
The following table presents long-lived assets by geographic region as of December 31, 2022 and 2021:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| U.S. | $ | $ | ||||||
| Israel | ||||||||
| EMEA | ||||||||
| Asia Pacific | ||||||||
| $ | $ | |||||||
Major customers’ data as a percentage of total revenues:
The following table sets forth the customers that accounted for 10% or more of the Company’s total revenues in each of the years set forth below:
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Customer A | % | % | % | |||||||||
| Customer B | % | % | % | |||||||||
F-51
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 17:- FINANCIAL INCOME, NET
Financial income, net:
| Year ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Financial income: | ||||||||||||
| Interest on bank deposits and other | $ | $ | $ | |||||||||
| Exchange rate differences, net | - | - | ||||||||||
| Realized gain on sale of marketable securities, net | - | |||||||||||
| Interest on marketable securities | ||||||||||||
| Financial expenses: | ||||||||||||
| Bank charges | ( | ) | ( | ) | ( | ) | ||||||
| Exchange rate differences, net | - | ( | ) | ( | ) | |||||||
| Realized loss on sale of marketable securities, net | ( | ) | - | - | ||||||||
| Amortization of premium and accretion of discount on marketable securities, net | ( | ) | ( | ) | ( | ) | ||||||
| ( | ) | ( | ) | ( | ) | |||||||
| Total financial income, net: | $ | $ | $ | |||||||||
NOTE 18:- BALANCES AND TRANSACTIONS WITH RELATED PARTIES
The Company’s policy is to enter into transactions with related parties on terms that, on the whole, are no less favorable than those available from unaffiliated third parties. Based on the Company’s experience in the business sectors in which it operates and the terms of its transactions with unaffiliated third parties, the Company believes that all of the transactions described below met this policy at the time they occurred.
| 1. | Fritz Companies Israel T. Ltd. (“Fritz”) |
Fritz is a
logistics company which is owned, in part, by the Chairman of the Board since March 2018. The Company has an ongoing logistic
contract with Fritz. During the years ended December 31, 2022, 2021 and 2020 logistic service fees amounted to $
| 2. | Accord Insurance Agency Ltd. (“Accord”) |
The Company
maintains a business relationship with Accord Insurance Agency Ltd., or Accord, a company which is an insurance agency that is owned in
part and controlled by the Company’s Chairman of the Board. Accord is the Company’s insurance agent for most of its insurance
policies. During the years ended December 31, 2022, 2021 and 2020, the total fees paid to Accord under the policies amounted to $
F-52
KORNIT DIGITAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- BALANCES AND TRANSACTIONS WITH RELATED PARTIES (Cont.)
| 3. | Priority Software Ltd. (“Priority”) |
Priority is
the Company’s ERP solution provider, which is owned, in part by a few of the Company’s Board members. During the years ended
December 31, 2022, 2021 and 2020 maintenance fees and additional licenses acquired amounted to $
| 4. | Tritone Technologies Ltd. (“Tritone”) |
On September
13, 2020
| 5. | Magalcom Ltd. (“Magalcom”) |
The Company
entered into a transaction with Magalcom which is owned, in part and controlled, by the Company’s Chairman of the Board, for
the replacement of communication equipment in the Company’s conference rooms. Total consideration to be paid to Magalcom
pursuant to this transaction is approximately $
NOTE 19:- SUBSEQUENT EVENT
During February 2023, two securities class action complaints were filed by certain shareholders of the Company in U.S. federal court in New Jersey against the Company, certain of the Company’s current and former officers and directors, the underwriters of the November 19, 2021 follow-on public offering and Amazon (which sold shares in that public offering), as defendants. The complaints assert claims under certain sections of the Exchange Act and seeks unspecified damages.
These lawsuits are at preliminary stages, and the Company believes these lawsuits are without merit and intends to defend these cases vigorously. As of the date hereof, the Company is unable to estimate a range of loss, if any, that could result were there to be adverse final decisions in these cases, and estimated liabilities have not been recorded in the consolidated financial statements.
- - - - - - - - - - - - - - - - - - - -
F-53