Nova Ltd 20-F for FY2020
Nova Ltd. (NVMI)
About this 20-F
Nova Ltd filed this 20-F on March 1, 2021, covering the fiscal year ended December 31, 2020 (FY2020).
Headline figures
Fiscal year ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $269.4M
- up 19.8% from $224.91M a year earlier
- Net income
- $47.91M
- up 36.2% from net income of $35.17M a year earlier
- Diluted EPS
- $1.65
- up 34.1% from $1.23 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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OR | ||
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the fiscal year ended | ||
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OR | ||
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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OR | ||
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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Commission File Number
(Exact name of Registrant as specified in its charter)
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Nova Measuring Instruments Ltd. |
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(Translation of Registrant’s name into English) |
(Jurisdiction of incorporation or organization) |
(Address of principal executive offices)
(Name, Telephone, E-mail and/or Facsimile number and Address of the Registrant’s Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
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The |
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.
Yes ☐
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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 “accelerated filer and large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer ☐ |
Non-accelerated filer ☐ |
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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 7(a)(2)(B) of the Securities Act.
Indicate by check mark whether the registrant has filed a report on the attestation to its management’s assessment of the effectiveness of its internal control 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.
Yes
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
International Financing Reporting Standards as issued by the International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
TABLE OF CONTENTS
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Item 1. Identity of Directors, Senior Management and Advisors |
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29 | |
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42 | |
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58 | |
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74 | |
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77 | |
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78 | |
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Item 11. Quantitative and Qualitative Disclosures About Market Risk. |
96 |
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Item 12. Description of Securities Other than Equity Securities. |
97 |
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Item 14. Material Modification to the Rights of Security Holders and Use of Proceeds. |
98 |
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Item 16D. Exemptions from the Listing Standards for Audit Committees. |
100 |
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Item 16E. Purchases of Equity Securities by the Issuer and Affiliates Purchasers. |
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- i -
Introduction
In this Annual Report, the “Company”, “Nova”, “we” or “our” refers to Nova Measuring Instruments Ltd. and its consolidated subsidiaries, when the context requires.
Our Functional Currency
Unless otherwise indicated, all amounts herein are expressed in United States dollars (“U.S. dollars”, “dollars”, “USD”, “US$” or “$”).
The currency of the primary economic environment in which we operate is the U.S. dollar, since substantially all our revenues to date have been denominated in U.S. dollars and over 50% of our expenses are in U.S. dollars or in New Israeli Shekels linked to the dollar. Transactions and balances denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been re-measured into dollars as required by the principles in ASC 830 Foreign Currency Matters. All exchange gains and losses from such re-measurement are included in the net financial income when they arise.
Cautionary Statement Regarding Forward-Looking Statements
Certain information contained herein, which does not relate to historical financial information, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, “believe”, “plan”, or similar expressions identify “forward looking statements”. Such statements, including without limitation, statements relating to our anticipated sales, revenues and expenses, our expectations with respect to our business and operations and our ability to gain market share are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We cannot guarantee future results, levels of activity, performance or achievements. We also undertake no obligation to release publicly any revisions to these forward–looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Among the factors that could cause our actual results in the future to differ materially from any opinions or statements expressed with respect to future periods are competitive industry conditions and the ability to forecast the needs of the semiconductor industry with respect to the very cyclical nature of the industry and the very fast pace of technology evolutions and factors related to the conditions of the global markets and the global economy. Various other factors that could cause our actual results to differ materially are set forth in “Item 3D. Risk Factors” in this annual report on Form 20-F and elsewhere herein.
- ii -
PART I
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
3A.Selected Financial Data
The following selected consolidated financial data as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this annual report. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and audited by our independent registered public accounting firm. The consolidated selected financial data as of December 31, 2017, and December 31, 2016 and for the years ended December 31, 2017 and December 31, 2016 have been derived from other consolidated financial statements not included in this Form 20-F that were also prepared in accordance with U.S. GAAP and audited by our independent registered public accounting firm. The selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to “Item 5. Operating and Financial Review and Prospects” and the consolidated financial statements and notes thereto and other financial information included elsewhere in this annual report on Form 20-F.
Summary of Consolidated Financial Data
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Year ended December 31, | ||||||||||||||||||||
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2016 |
2017 |
2018 |
2019 |
2020 | ||||||||||||||||
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(in thousands, except per share data) | ||||||||||||||||||||
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Consolidated Statement of Operations Data: | ||||||||||||||||||||
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Revenues |
$ |
163,903 |
$ |
221,992 |
$ |
251,134 |
$ |
224,909 |
$ |
269,396 | ||||||||||
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Cost of revenues |
88,623 |
90,805 |
105,900 |
103,089 |
116,473 | |||||||||||||||
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Gross profit |
75,280 |
131,187 |
145,234 |
121,820 |
152,923 | |||||||||||||||
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Operating expenses: | ||||||||||||||||||||
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Research and development expenses, net |
34,998 |
38,956 |
45,451 |
44,508 |
53,015 | |||||||||||||||
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Sales and marketing expenses |
20,736 |
23,751 |
27,993 |
28,213 |
29,321 | |||||||||||||||
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General and administrative expenses |
6,835 |
8,100 |
8,735 |
10,066 |
12,514 | |||||||||||||||
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Amortization of intangible assets |
2,545 |
2,561 |
2,613 |
2,625 |
2,503 | |||||||||||||||
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Total operating expenses |
65,114 |
73,368 |
84,792 |
85,412 |
97,353 | |||||||||||||||
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Operating income |
10,166 |
57,819 |
60,442 |
36,408 |
55,570 | |||||||||||||||
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Financing income, net |
1,216 |
2,276 |
2,984 |
3,078 |
926 | |||||||||||||||
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Income before taxes on income |
11,382 |
60,095 |
63,426 |
39,486 |
56,496 | |||||||||||||||
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Income taxes expenses |
1,738 |
13,636 |
9,051 |
4,315 |
8,589 | |||||||||||||||
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Net income for the year |
$ |
9,644 |
$ |
46,459 |
$ |
54,375 |
$ |
35,171 |
47,907 | |||||||||||
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Earnings per share: | ||||||||||||||||||||
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Basic |
$ |
0.35 |
$ |
1.68 |
$ |
1.94 |
$ |
1.26 |
$ |
1.71 | ||||||||||
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Diluted |
$ |
0.35 |
$ |
1.63 |
$ |
1.89 |
$ |
1.23 |
$ |
1.65 | ||||||||||
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Shares used in calculation of net earnings per share (in thousands): | ||||||||||||||||||||
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Basic |
27,175 |
27,696 |
28,022 |
27,895 |
28,097 | |||||||||||||||
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Diluted |
27,503 |
28,524 |
28,765 |
28,574 |
28,950 | |||||||||||||||
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December 31, | ||||||||||||||||||||
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2016 |
2017 |
2018 |
2019 |
2020 | ||||||||||||||||
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(in thousands) | ||||||||||||||||||||
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Consolidated Balance Sheet Data: | ||||||||||||||||||||
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Working capital |
$ |
128,872 |
$ |
179,782 |
$ |
233,499 |
$ |
256,699 |
$ |
497,767 | ||||||||||
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Total assets |
218,593 |
283,285 |
333,430 |
400,443 |
655,786 | |||||||||||||||
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Capital stock (including Ordinary shares and additional paid-in capital) |
117,102 |
122,500 |
122,386 |
120,811 |
129,348 | |||||||||||||||
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Shareholders’ equity |
174,717 |
226,736 |
280,740 |
314,539 |
371,538 | |||||||||||||||
1
3B. Capitalization and Indebtedness
Not applicable.
3C. Reasons for the Offer and Use of Proceeds
Not applicable.
3D. Risk Factors
Summary Risk Factors
Our business is subject to a number of risks of which you should be aware of before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this annual report. These risks include, but are not limited to, the following:
Economic and External Risks
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Our business could be disrupted by catastrophic events, such as the outbreak of COVID-19.
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Increased information technology security threats, more sophisticated computer crime, and changes in privacy laws could disrupt our business.
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We are dependent on international sales, which expose us to foreign political and economic risks that could impede our plans for expansion and growth.
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Changes in U.S. trade policies and other factors beyond our control may adversely impact our business, financial condition and results of operations.
Risks related to technology and Intellectual Property
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Because of the technical nature of our business, our intellectual property is extremely important to our business, and our inability to protect our intellectual property or our involvement in related litigation could harm our competitive position.
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We may incorporate open source technology in some of our software and products, which may expose us to liability and have a material impact on our product development and sales.
2
Risks related to our industry
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We operate in an extremely competitive market, and if we fail to compete effectively or to respond to the rapid technological changes, our revenues and market share will decline.
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The ongoing consolidation in our industry may harm us if our competitors are able to offer a broader range of products and greater customer support than we can offer.
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The markets we target are cyclical and it is difficult to predict the length and strength of any downturn or expansion period.
Operational risks
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Because most of our current sales are dependent on few specific product lines, factors that adversely affect the pricing and demand for these product lines could reduce our sales.
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We depend on a small number of large customers, and the loss of one or more of them could significantly lower our revenues.
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There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs or to ensure the sale of related inventory.
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New product lines that we may introduce in the future may contain defects, which will require us to allocate time and financial resources to correct.
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Our dependence on a single manufacturing facility per product line magnifies the risk of an interruption in our production capabilities.
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We may not be successful in our efforts to complete and integrate current and/or future acquisitions, which could disrupt our current business activities and adversely affect our results of operations or future growth.
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We depend on a limited number of suppliers, and in some cases a sole supplier. Any disruption or termination of these supply channels may adversely affect our ability to manufacture our products and to deliver them to our customers.
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Our operations may be disrupted by loss of key personnel.
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Our lengthy sales cycle increases our exposure to customer delays in orders, which may result in obsolete inventory and volatile quarterly revenues.
Risks Related to Our Incorporation and Location in Israel
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Political, economic, and military instability in Israel may impede our ability to operate and harm our financial results.
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Our operations may be disrupted by the obligation of key personnel to perform military service.
Risks Related to Our Indebtedness and Capital Structure
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Our convertible senior notes may impact our financial results, result in the dilution of existing shareholders, create downward pressure on the price of our ordinary shares, and restrict our ability to take advantage of future opportunities. We may not have the ability to raise the funds necessary to settle conversions, and the accounting method for the Convertible Notes could adversely affect our reported financial condition and results
Financial, legal, regulatory and taxation risks
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Our profit margin may be seriously harmed by currency fluctuations.
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We participate in government programs under which we receive research and development grants. Some of these programs impose restrictions on our ability to use the technologies developed under these programs. The reduction or termination of these programs would increase our costs.
3
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The application of tax laws is subject to interpretation and if tax authorities challenge our methodologies or our analysis of our tax rates it could result in an increase to our worldwide effective tax rate and cause us to change the way we operate our business.
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We experience quarterly fluctuations in our operating results, which may adversely impact our share price.
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Some of our contracts and arrangements potentially subject us to the risk of significant or non-limited liability.
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The market price of our ordinary shares may be affected by a limited trading volume and may fluctuate significantly.
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A bankruptcy of one of the banks in which or through which we hold or invest our cash reserves, might prevent us to access that cash for an uncertain period of time.
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We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
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Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.
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We may be classified as a “passive foreign investment company” for U.S. income tax purposes, which could have significant and adverse tax consequences to U.S. shareholders.
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If a United States person is treated as owning at least 10% of our shares, such holder may be subject to adverse U.S. federal income tax consequences.
4
Economic and External Risks
Our business could be disrupted by catastrophic events, such as the recent outbreak of COVID-19.
The COVID-19 pandemic has caused substantial global disruptions, including in the jurisdictions where we develop our products and conduct business and may cause additional disruptions in the future, which are impossible to predict. Local, regional and national authorities in numerous jurisdictions, including the United States and Israel, have implemented a variety of measures designed to slow the spread of the virus, including social distancing guidelines, quarantines, banning of non-essential travel and requiring the cessation of non-essential activities on the premises of businesses.
Some of the risks associated with the pandemic or a worsening of the pandemic in the future include:
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cancellation or reduction of routes available from common carriers, which may cause delays in our ability to deliver or service our products or receive components from suppliers necessary to manufacture or service our products;
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travel bans or the requirement to quarantine for a lengthy period after entering a jurisdiction, which may delay our ability to install the products we sell or service those products following installation;
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governmental orders or employee exposure requiring us, our customers or our suppliers to discontinue manufacturing products at our respective facilities for a period of time;
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reduced demand for our products, push-out of deliveries or cancellation of orders by our customers caused by a global recession or slower demand resulting from the pandemic and the measures implemented by authorities;
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increased costs or inability to acquire components necessary for the manufacture of our products due to lower availability;
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Financial difficulties of one of our suppliers, which will affect our ability to manufacture our products on time for delivery to our customers;
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absence of liquidity at customers and suppliers caused by disruptions from the pandemic, which may hamper the ability of customers to pay for the products they purchase on time or at all, or hamper the ability of our suppliers to continue to supply components to us in a timely manner or at all; and
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loss of efficiencies due to remote working requirements for our employees.
Furthermore, to the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other factors described in this section and in the “Risk Factors’” section in this Form 20-F.
The occurrence of unforeseen or catastrophic events such as terrorist attacks, extreme terrestrial or solar weather events or other natural disasters, emergence of a pandemic, or other widespread health emergencies (or concerns over the possibility of such an emergency), could create economic and financial disruptions, and could lead to operational difficulties that could impair our ability to manage our business.
Increased information technology security threats, more sophisticated computer crime, and changes in privacy laws could disrupt our business.
Our global operations are linked by information systems, including telecommunications, the internet, our corporate intranet, network communications, email and various computer hardware and software applications. In light of information technology security threats, we have implemented network security measures and engaged the services of a cybersecurity consulting firm to conduct an information security risk assessment review which was reviewed and discussed by our audit committee and board of directors. In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyberattacks targeting businesses such as ours. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, or others to disclose information or unwittingly provide access to systems or data.
5
Although we have invested in measures to reduce these risks, we can provide no assurance that our current IT systems are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. The cost and operational consequences of implementing, maintaining and enhancing further data or system protection measures could increase significantly to overcome increasingly intense, complex, and sophisticated global cyber threats. Despite our best efforts, we are not fully insulated from data breaches and system disruptions and, accordingly, we have experienced and expect to continue to experience actual or attempted cyberattacks of our IT networks. Although none of these actual or attempted cyberattacks has had a material adverse effect on our operations or financial condition thus far, we cannot guarantee that any such incidents will not have a material adverse effect on our operations or financial condition in the future. For instance, during the first half of 2020, our G&A expenses included a $3 million expense, related to an incident, in which a financial institution used by the Company for certain financial transactions, wired out Company funds without Company's authorization. These wire transfers were executed based on instructions given by a fraudster, directly to the financial institution. Although almost all of such funds have been retrieved in full, there is no assurance that such events, at a larger scale, will not happen in the future. Any material breaches of cybersecurity or media reports of perceived security vulnerabilities to our systems or those of the Company’s third parties, even if no breach has been attempted or occurred, could cause us to experience reputational harm, loss of customers and revenue, regulatory actions and scrutiny, sanctions or other statutory penalties, litigation, liability for failure to safeguard our customers’ information, or financial losses that are either not insured against or not fully covered through any insurance maintained by us. Any of the foregoing may have a material adverse effect on our business, operating results and financial condition.
As such, our tools and servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems and tools located at our facility or at customer sites, or could be subject to system failures or malfunctions for other reasons. Increased information technology security threats and more sophisticated computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data or customer data. Cybersecurity attacks could also include attacks targeting the security, integrity and/or reliability of the hardware and software installed in our products. System failures or malfunctioning could disrupt our operations and our ability to timely and accurately process and report key components of our financial results.
Further, the regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. In the European Union, the General Data Protection Regulation (GDPR) imposes more stringent data protection requirements and provides for greater penalties for noncompliance. The California Consumer Privacy Act (CCPA), enacted in 2018 and entered into effect in January 2020, creates new consumer rights relating to the access to, deletion of, and sharing of personal information that is collected by businesses. Any inability to adequately address privacy and security concerns or comply with applicable privacy and data security laws, rules and regulations could have an adverse effect on our business prospects, results of operations and/or financial position.
6
We are dependent on international sales, which expose us to foreign political and economic risks that could impede our plans for expansion and growth.
Our principal customers are located in Taiwan, South Korea, China, Japan and the United States, and we produce our products in Israel and the United States. International operations expose us to a variety of risks that could seriously impact our financial condition and impede our growth including:
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instability in political or economic conditions, including but not limited to inflation, recession, foreign currency exchange restrictions and devaluations, restrictive governmental controls on the movement and repatriation of earnings and capital, and actual or anticipated military or political conflicts, particularly in emerging markets;
•
intergovernmental conflicts or actions, including but not limited to armed conflict, trade wars and acts of terrorism or war; and
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interruptions to the Company’s business with its largest customers, distributors and suppliers resulting from but not limited to, strikes, and financial instabilities. For instance, trade restrictions, changes in tariffs and import and export license requirements could adversely affect our ability to sell our products in the countries adopting or changing those restrictions, tariffs or requirements. This could reduce our sales by a material amount.
Specifically, starting 2018 and to date, the U.S. Department of Commerce has taken actions to restrict exports to several Chinese based semiconductor manufacturers, such as Fujian Jinhua Integrated Circuit Company, Ltd. (“JHICC”) and Semiconductor Manufacturing International Corporation (“SMIC”). These customers have acquired several of our metrology solutions in the past. Due to the abovementioned export restrictions, our U.S. subsidiary is currently restricted from shipping tools or parts or provide any form of service to JHICC and SMIC, until it is cleared to resume by the appropriate authorities.
In addition, in 2020 the US Department of State introduced restrictions on exporting to customers who are suppliers to Huawei, which is a Chinese based electronics supplier. Since the introduction of these restrictions, our US subsidiary has put in place a procedure to ensure compliance with these restrictions.
In some cases, the abovementioned export restrictions might also be applicable to the products which we export from other countries.
Additionally, the uncertainty of the economic, financial, regulatory, trade, tax and legal implications of the withdrawal of the U.K. from the E.U. (“Brexit”) and other significant political developments could also have a materially adverse effect on our business. All of these risks could result in increased costs or decreased revenues, either of which could have a materially adverse effect on our profitability.
Changes in U.S. trade policies and other factors beyond our control may adversely impact our business, financial condition and results of operations.
The international environment in which we operate is affected from inter-country trade agreements and tariffs. As a result of recent revisions in the U.S. administrative policy there are, and may be additional, changes to existing trade agreements, greater restrictions on free trade and significant increases in tariffs on goods imported into the United States, particularly those manufactured in China, Mexico and Canada. Future actions of the U.S. administration and that of foreign governments, including China, with respect to tariffs or international trade agreements and policies remains currently unclear.
7
The escalation of a trade war, tariffs, retaliatory tariffs or other trade restrictions on products and materials either exported by us to China or raw materials imported by us from China may significantly impede our ability to provide our solutions and service our customers in China or other effected locations. Such developments may result in a decrease in demand for our products and technologies as well as delays in payments from our customers. Furthermore, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries, where our customers are located, could adversely affect our business, financial condition, operating results and cash flows.
We may be affected by instability in the global economy and by financial turmoil.
Instability in the global markets and in the geopolitical environment in many parts of the world as well as other disruptions may continue to put pressure on global economic conditions. In the event global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, we may experience material impacts on our business, operating results, and financial condition.
Because we derive a significant portion of our revenues from sales in Asia, our sales could be hurt by instability of Asian economies.
A number of Asian countries have experienced political and economic instability. For instance, Taiwan and China have had a number of disputes, as have North and South Korea, and Japan has for a number of years experienced significant economic instability. Additionally, the Asia-Pacific region is susceptible to the occurrence of natural disasters, such as earthquakes, cyclones, tsunamis and flooding. We have subsidiaries in Taiwan, Japan and South Korea and we have significant customers in Taiwan and South Korea as well as in China. An outbreak of hostilities or other political upheaval, economic downturns or the occurrence of a natural disaster in these or other Asian countries would likely harm the operations of our customers in these countries, causing our sales to suffer.
8
Risks related to technology and Intellectual Property
Because of the technical nature of our business, our intellectual property is extremely important to our business, and our inability to protect our intellectual property could harm our competitive position.
Our continued success depends upon our ability to protect our core technology and intellectual property. We therefore have an extensive program devoted resources to seeking patent protection for our inventions and discoveries that we believe will provide us with competitive advantages. Our patents and applications principally cover various aspects of optical measurement systems and methods, integrated process control implementation concepts, and optical, opto-mechanical and mechanical design. In addition, our patents and applications cover various aspects of X-ray based measurement systems and methods, including process control implementation concepts, X-ray energy sources, electron optics and detection, vacuum systems and equipment integration.
We cannot assure that:
•
pending patent applications will be approved; or
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any patents will be broad enough to protect our technology, will provide us with competitive advantages or will not be challenged or invalidated by third parties. We also cannot assure that others will not independently develop similar products, duplicate our products or, if patents are issued to us, design around these patents. Furthermore, because patents may afford less protection under foreign law than is available under U.S. law, we cannot assure that any foreign patents issued to us will adequately protect our proprietary rights.
In addition, some of the patents which relate to our main-stream products have already expired or are expected to be expired in the coming years. Such expiration may add significant competition to our tools in this area, which may lead to a decrease in our incomes. In addition, not all of our patents are covering all territories we operate in, and thus in some territories there is less coverage to some product lines.
In addition to patent protection, we also rely upon trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods to protect our confidential and proprietary information. Despite these efforts, we cannot be certain that others will not otherwise gain access to our trade secrets or disclose our technology.
Additionally, as part of our long-term technological collaboration, we are engaged with joint development activities with some of our strategic customers and vendors as well as with research institutes. These activities impose some limitations on the joint intellectual property developed as part of these programs.
Furthermore, we may be required to institute legal proceedings to protect our intellectual property. If such legal proceedings are resolved adversely to us, our competitive position and/or results of operations could be harmed. For additional information on our intellectual property, see “Item 4B. Business Overview — Intellectual Property” in this annual report on Form 20-F.
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There has been significant litigation involving intellectual property rights in the semiconductor and related industries, and similar litigation involving Nova could force us to divert resources to defend against such litigation or deter our customers from purchasing our systems.
We have been, and may in the future be, notified of allegations that we may be infringing intellectual property rights possessed by others. In addition, we may be required to commence legal proceedings against third parties, which may be infringing our intellectual property, in order to defend our intellectual property. In the future, protracted litigation and expense may be incurred to defend ourselves against alleged infringement of third-party rights or to defend our intellectual property against infringement by third parties. Adverse determinations in that type of litigation could:
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result in our loss of proprietary rights;
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subject us to significant liabilities, including triple damages in some instances;
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require us to seek licenses from third parties, which licenses may not be available on reasonable terms or at all; or
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prevent us from selling our products.
Any litigation of this type, even if we are ultimately successful, could result in substantial cost and diversion of time and effort by our management, which by itself could have a negative impact on our profit margin, available funds, competitive position and ability to develop and market new and existing products. For additional information on our intellectual property, see “Item 4B. Business Overview — Intellectual Property” in this annual report on Form 20-F.
We may incorporate open source technology in some of our software and products, which may expose us to liability and have a material impact on our product development and sales.
Some of our software and products utilize open source technologies. These technologies may be subject to certain open source licenses, including but not limited to the General Public License, which, when used or integrated in particular manners, impose certain requirements on the subsequent use of such technologies, and pose a potential risk to proprietary nature of products. In the event that we have or will in the future, use or integrate software that is subject to such open source licenses into or in connection with our products in such ways that will trigger certain requirements of these open source licenses, we may (i) be required to include certain notices and abide by other requirements in the absence of which we may be found in breach of the copyrights owned by the creators of such open source technologies; and/or (ii) be required to disclose our own source code or parts thereof to the public, which could enable our competitors to eliminate some or any technological advantage that our products may have over theirs. Any such requirement to disclose our source code or other confidential information related to our products, and the failure to abide by license requirement resulting in copyright infringement, could materially adversely affect our competitive position and impact our business results of operations and financial condition.
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Risks related to our industry
We operate in an extremely competitive market, and if we fail to compete effectively, our revenues and market share will decline.
Although the market for process control systems used in semiconductor manufacturing is currently concentrated and characterized by relatively few participants, the semiconductor capital equipment industry is intensely competitive. We compete mainly with Onto Innovation Inc. (formerly Nanometrics Inc. and Rudolph Technologies Inc., who have merged during the second half of 2019), and KLA Corp., which manufacture and sell integrated and/or stand-alone process control systems. In addition, we compete with process equipment manufacturers (“PEMs”), such as ASML Holdings N.V., and Applied Materials Inc., which develop (or might as well acquire companies which develop) in-situ sensors and metrology products. Established companies, both domestic and foreign, compete with our product lines, and new competitors enter our market from time to time. Some of our competitors have greater financial, engineering, manufacturing and marketing resources than we do. If a particular customer selects a competitor’s capital equipment, we expect to experience difficulty in selling our solution to that customer for a significant period of time. A substantial investment is required by the customers to evaluate, test, select and integrate capital equipment into a production line. As a result, once a manufacturer has selected a particular vendor’s capital equipment, we believe that the manufacturer generally relies upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, unless our systems offer performance or cost advantages that outweigh a customer’s expense of switching to our systems, it will be difficult for us to achieve significant sales from that customer once it has selected another vendor’s system for an application. We believe that our ability to compete successfully depends on a number of factors both within and outside of our control, including:
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the contribution and value our solutions bring to our customers;
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our product innovation, quality and performance;
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our global technical service and support;
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the return on investment (ROI) of our equipment and its cost of ownership;
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the breadth of our product line;
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our success in developing and marketing new products; and
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the extendibility of our products.
If we fail to compete in a timely and cost-effective manner against current or future competitors, our revenues and market share will decline.
If we do not respond effectively and on a timely basis to rapid technological changes, our ability to attract and retain customers could be diminished, which would have an adverse effect on our sales and ability to remain competitive.
The semiconductor manufacturing industry is characterized by rapid technological changes, new product introductions and enhancements and evolving industry standards. Our ability to remain competitive and generate revenue will depend in part upon our ability to develop new and enhanced systems at competitive prices in a timely and cost-effective manner and to accurately predict technology transitions. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate the future demand for products. If we fail to correctly anticipate future demand for products, our sales and competitive position will deteriorate. In addition, the development of new measurement technologies, new product introductions or enhancements by our competitors could cause a decline in our sales or loss of market acceptance of our existing products.
The ongoing consolidation in our industry may harm us if our competitors are able to offer a broader range of products and greater customer support than we can offer.
We believe that the semiconductor capital equipment market has undergone consolidation over the last few years. For example, Lam Research Corporation acquired Novellus Systems Inc. in 2016 and Coventor in 2017; Thermo Fisher Scientific Inc. acquired FEI Company, Inc. in 2016; ASML Holdings N.V. acquired Hermes Microvision Inc. in 2016; KLA Corporation acquired Orbotech Ltd. in 2019; and Nanometrics Inc. and Rudolph Technologies, Inc. merged in 2019. We believe that similar acquisitions and business combinations involving our competitors, our customers and the PEMs may occur in the future. These acquisitions could adversely impact our competitive position by enabling our competitors and potential competitors to expand their product offerings and customer services, which could provide them an advantage in meeting customers’ needs, particularly with those customers that seek to consolidate their capital equipment requirements with a smaller number of vendors. The greater resources, including financial, marketing, intellectual property and support resources, of competitors involved in these acquisitions could allow them to accelerate the development and commercialization of new competitive products and the marketing of existing competitive products to their larger installed bases. Accordingly, such business combinations and acquisitions by competitors and/or customers could jeopardize our competitive position.
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The markets we target are cyclical and it is difficult to predict the length and strength of any downturn or expansion period.
The semiconductor capital equipment market and industries, which are cyclical, experienced steep downturns and upturns in the last two decades. In recent years, we have seen a more stable overall capital investment patterns, yet we cannot predict the length and strength of potential future downturns or expansions.
Operational risks
Because substantially most of our current sales are dependent on few specific product lines, factors that adversely affect the pricing and demand for these product lines could substantially reduce our sales.
We are currently dependent on few process control product lines. We expect revenues from these product lines to continue to account for a substantial portion of our revenues in the coming years. As a result, factors adversely affecting the pricing of, or demand for, these product lines, such as competition and technological change, could significantly reduce our sales.
We depend on a small number of large customers, and the loss of one or more of them could significantly lower our revenues.
Like our peers serving the semiconductor front end market, our customer base is highly concentrated among a limited number of large customers. We anticipate that our revenues will continue to depend on a limited number of major customers, although the companies considered to be our major customers and the percentage of our revenue represented by each major customer may vary from period to period. As a result of our customer concentration, our financial performance may fluctuate significantly from period to period based, among others, on exogenous circumstances related to our clients. For example, it is possible that any of our major customers could terminate its purchasing relationship with us or significantly reduce or delay the amount of orders for our products, purchase products from our competitors, or develop its own alternative solutions internally. The loss of any one of our major customers would adversely affect our revenues. Furthermore, if any of our customers become insolvent or have difficulties meeting their financial obligations to us for any reason, we may suffer losses. For more information regarding our sales by major customers as percentage of our total sales, see Note 12 to our consolidated financial statements contained elsewhere in this report.
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Our inability to significantly reduce spending during a protracted slowdown in the semiconductor industry could reduce our prospects of achieving continued profitability.
Historically, we have derived all our revenues, and we expect to continue to derive practically all of our revenues, from sales of our products and related services to the semiconductor industry. Our business depends in large part upon capital expenditures by semiconductor manufacturers, which in turn depend upon the current and anticipated demand for semiconductors. The semiconductor industry has experienced severe and protracted cyclical downturns and upturns. Cyclical downturns, as those we have experienced in the past, may cause material reductions in the demand for the products and services that we offer, and may result in a decline in our sales. In addition, our ability to significantly reduce expenses during such cyclical downturn may be limited because of:
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our continuing need to invest in research and development;
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our continuing need to market our new products; and
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our extensive ongoing customer service and support requirements worldwide.
Furthermore, during 2020, we increased our leased facilities and related investments and our operating expenses. In the event of a global recession or certain other economic conditions forcing the Company to materially reduce its expenses, portions of such facilities may be rendered obsolete. As a result, we may have difficulty achieving continued profitability during a protracted slowdown.
There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs or to ensure the sale of inventory related to these products.
We must continue to make significant investments in research and development in order to introduce new products and technologies, or to enhance the performance, features and functionality of our existing products, to keep pace with the competitive landscape and to satisfy customer demands. Substantial research and development costs are typically incurred before we confirm the technical feasibility and commercial viability of a new product, and not all development activities result in commercially viable products. There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs associated with such products or enhancements. In addition, we cannot be sure that these products or enhancements will receive market acceptance or that we will be able to sell these products at prices that are favorable to us. Our business will be seriously harmed if we are unable to sell our products at favorable prices or if the market in which we operate does not accept our products. In addition, in some cases, we accumulate inventories based on sales forecasts. If such sales forecasts are not materialized, we might need to write-off the related inventory, which will increase our losses.
New product lines that we may introduce in the future may contain defects, which will require us to allocate time and financial resources to correct.
Our new product lines may contain defects when first introduced. If there are defects, we will need to divert the attention of our personnel from our ongoing product development efforts to address the detection and correction of the defects. We cannot provide assurances that we will not incur any costs or liabilities or experience any lags or delays in the future. Moreover, the occurrence of such defects, whether caused by our products or the products of another vendor, may result in significant customer relations problems and adversely affect our reputation and may impair the market acceptance of our products.
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If any of our systems fail to meet or exceed our internal quality specifications, we cannot ship them until such time as they have met such specifications. If we experience significant delays or are unable to ship our products to our customers as a result of our internal processes or for any other reason, our business and reputation may be adversely affected.
Our products are complex and require technical expertise to design and manufacture. Various problems occasionally arise during the manufacturing process that may cause delays and/or impair product quality. We actively monitor our manufacturing processes to ensure that our products meet our internal quality specifications. Any significant delays stemming from the failure of our products to meet or exceed our internal quality specifications, or for any other reasons, would delay our shipments. Shipment delays could be harmful to our business, revenues and reputation in the industry.
Our dependence on a single manufacturing facility per product line magnifies the risk of an interruption in our production capabilities.
We have one manufacturing facility for our Optical CD product lines, which is located in Weizmann Science Park, Nes Ziona, Israel, and one manufacturing facility for our XPS product line, which is located in Fremont, CA, US (the "Manufacturing Facilities"). These Manufacturing Facilities include special clean room environments and manufacturing jigs, which are customized to our needs. In addition, most of our ongoing inventories, including our main warehouse and work in process, are located in these Manufacturing Facilities. Although we adopted measures to protect these manufacturing facilities and inventories, and a disaster recovery plan, any event affecting any of our Manufacturing Facilities, including natural disaster, labor stoppages or armed conflict, may disrupt or indefinitely discontinue our manufacturing capabilities and could significantly impair our ability to fulfill orders and generate revenues, thus negatively impacting our business.
Our lease agreements for our Manufacturing Facilities include provisions that exempt the landlord and others from liability for damages to our Manufacturing Facilities.
Pursuant to the lease agreements for our Manufacturing Facilities, the landlord and anyone on its behalf, and additional tenants are exempt from any liability for direct or consequential damages to our Manufacturing Facilities, except in the event of willful misconduct. While we have obtained insurance policies against certain damages, the aforementioned exemption of liability could compromise our ability to recover the full amount of such damages, and consequently we may incur substantial costs upon the occurrence of such damages.
Because shipment dates may be changed and some of our customers may cancel or delay orders with little or no penalty, and since we encounter difficulties in collecting cancellation fees from our customers, our backlog may not be a reliable indicator of actual sales and financial results.
We schedule production of our systems based upon order backlog and customer forecasts. We include in backlog only those orders received from the customers in which a delivery date has been specified. In general, our ability to rely on our backlog for future forecasting and planning is limited because shipment dates may be changed, some customers may cancel or delay orders with little or no penalty, and our ability to collect cancellation fees from customers is not assured. Thus, our backlog may not be a reliable indicator of actual sales and financial results.
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We may not be successful in our efforts to complete and integrate current and/or future acquisitions, which could disrupt our current business activities and adversely affect our results of operations or future growth.
Any acquisition may involve many risks, including the risks of:
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diverting management’s attention and other resources from our ongoing business concerns;
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entering markets in which we have no direct prior experience;
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improperly evaluating new services, products and markets;
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being unable to maintain uniform standards, controls, procedures and policies;
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failing to comply with governmental requirements pertaining to acquisitions of local companies or assets by foreign entities;
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being unable to integrate new technologies or personnel;
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incurring the expenses of any undisclosed or potential liabilities; and
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the departure of key management and employees.
If we are unable to successfully complete our future acquisitions or to effectively complete the integration of our future acquisitions, our ability to grow our business or to operate our business effectively could be reduced, and our business, financial condition and operating results could suffer. Even if we are successful in completing acquisitions, we cannot assure that we will be able to integrate the operations of the acquired business without encountering difficulty regarding different business strategies with respect to marketing and integration of personnel with disparate business backgrounds and corporate cultures. Further, in certain cases, mergers and acquisitions require special approvals, or are subject to scrutiny by the local authorities, and failing to comply with such requirements or to receive such approvals, may prevent or limit our ability to complete the acquisitions as well as expose us to legal proceedings prior or following the consummation of such acquisitions. In some cases, such proceedings, if initiated, may conclude in a requirement to divest portions of the acquired business.
We depend on continuous cooperation with Process Equipment Manufacturers (“PEMs”) to enable sales of our integrated metrology systems, and the loss of PEMs as business partners could harm our business.
We believe that sales of integrated metrology systems will continue to be an important source of our revenues. Sales of our integrated metrology systems depend upon the ability of PEMs to sell semiconductor equipment products that are able to integrate with our metrology systems. If our PEMs are unable to sell such products, if they choose to focus their attention on products that do not integrate our systems, or if they choose to develop their own metrology solutions, our business could suffer. If we were to lose our PEMs as business partners for any reason, our inability to realize sales from integrated metrology systems could significantly harm our business. In addition, we may not be able to develop or market new integrated metrology products, which could slow or prevent our growth.
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Some of our commercial agreements with PEMs and customers may include exclusivity provisions and limitations on the use of certain intellectual property. Such limitations may prevent us from engaging in certain business relationships with third parties, and may limit our ability to use certain elements of our intellectual property. As a result, our ability to introduce new products in relevant markets might be affected.
Some of our commercial agreements with PEMs and customers may include exclusivity provisions, which prevent us from engaging in certain business relationships with third parties. In addition, some of our commercial agreements with PEMs also include limitations on the use of certain joint intellectual property. These exclusivity obligations and limitations are often used as a tool to promote the development and the penetration of innovative new solutions, and are usually limited in terms of scope and length. When considering whether to enter into any such exclusivity arrangements or accepting such limitations, we usually take into consideration the terms of the exclusivity (e.g., length and scope), the expected benefit to the Company, and the risks and limitations associated with such exclusivity or limiting undertakings. Exclusivity obligations or limitation of use relating to certain parts of our technology and products may affect our ability to commercialize our products, engage in potentially beneficial business relationships with third parties (including by means of a merger or acquisition), or introduce new products into relevant markets, which could slow or prevent our growth.
We depend on a limited number of suppliers, and in some cases a sole supplier. Any disruption or termination of these supply channels may adversely affect our ability to manufacture our products and to deliver them to our customers.
We purchase components, subassemblies and services from a limited number of suppliers and occasionally from a single or a sole source. Disruption or termination of these sources could occur (due to several factors, including, but not limited to, bankruptcy, work stoppages, acts of war, terrorism, fire, earthquake, energy shortages, flooding or other natural disasters), and these disruptions could have at least a temporary adverse effect on our operations. Although we generally maintain an inventory of critical components used in the manufacture and assembly of our systems, such supplies may not be sufficient to avoid potential delays that could have an adverse effect on our business.
To date, we have not experienced any material disruption or termination of our supply sources.
A prolonged inability on our part to obtain components included in our systems on a cost-effective basis could adversely impact our ability to deliver products on a timely basis, which could harm our sales and customer relationships.
The disclosure rules regarding the use of conflict minerals may affect our relationships with suppliers and customers.
The Securities and Exchange Commission requires certain disclosure by companies that use conflict minerals in their products, with substantial supply chain verification requirements in the event that the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. These rules and verification requirements may impose additional costs on us and on our suppliers, and limit the sources or increase the prices of materials used in our products. Among other things, this rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of components that are incorporated into our products. In addition, the number of suppliers who provide conflict-free minerals may be limited, and there may be material costs associated with complying with the disclosure requirements, such as costs related to the process of determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. We may not be able to sufficiently verify the origins of the relevant minerals used in components manufactured by third parties through the procedures that we implement, and we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so. While we have created processes and procedures designed to enable compliance to these rules, if in the future we are unable to certify that our products are conflict free, we may face challenges with our customers, which could place us at a competitive disadvantage and harm our reputation.
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We depend on a small number of employees who possess both executive and technical expertise, and the loss of any of these key employees would hurt our ability to implement our strategy and to compete effectively.
Because we rely on employees with both executive and advanced technical skills, our success depends significantly upon the continued contributions of our officers and key personnel. All of our key management and technical personnel have expertise, which is in high demand among our competitors, and the loss of any of these individuals could cause our business to suffer. We do not maintain life insurance policies for our officers and directors.
Our lengthy sales cycle increases our exposure to customer delays in orders, which may result in obsolete inventory and volatile quarterly revenues.
Sales of our systems depend, in significant part, upon our customers adding new manufacturing capacity or expanding existing manufacturing capacity, both of which involve a significant capital commitment. We may experience delays in finalizing sales while a customer evaluates and approves an initial purchase of our systems. Our sales cycle for new customers, products or applications, may take longer than twelve (12) months to complete. During this time, we may expend substantial funds and management effort, but fail to make any sales. Lengthy sales cycles subject us to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which we have limited control.
Risks Related to Our Incorporation and Location in Israel
Political, economic and military instability in Israel may impede our ability to operate and harm our financial results.
Our principal executive offices and research and development facilities are located in Israel and therefore may be influenced by regional instability and extreme military tension. Accordingly, political, economic and military conditions in Israel and the surrounding region could directly affect our business. Any armed conflicts, political instability, terrorism, cyberattacks or any other hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could affect adversely our operations. Ongoing and revived hostilities or other Israeli political or economic factors, could prevent or delay shipments of our products, harm our operations and product development and cause any future sales to decrease. In the event that hostilities disrupt the ongoing operation of our facilities or the airports and seaports on which we depend to import and export our supplies and products, our operations may be materially adverse affected.
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On Israel’s domestic front there is currently a level of unprecedented political instability. The Israeli government has been in a transitionary phase since December of 2018, when the Israeli Parliament, or the Knesset, first resolved to dissolve itself and call for new general elections. In 2019, Israel held general elections twice – in April and September – and a third general election was held on March 2, 2020. The Knesset, for reasons related to this extended political transition, has failed to pass a budget for the year 2020, and certain government ministries, which may be critical to the operation of our business, are without necessary resources and may not receive sufficient funding moving forward. During December 2020, the government was unable to pass a budget by the applicable deadline, triggering a snap election expected to take place during March, 2021, lurching the country back into a protracted political crisis. Given the likelihood that the current political stalemate might not be resolved during the next calendar year, our ability to conduct our business effectively may be adversely affected.
Our operations may be disrupted by the obligation of key personnel to perform military service.
Some of our executive officers and employees in Israel are obligated to perform significant periods of military reserve service until the age of 40 for soldiers and until the age of 45 for officers. This time-period may also be extended by the Military Chief of the General Staff and the approval of the Minister of Defense or by a directive of the Minister of Defense in the event of a declared national emergency. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees due to military service. To date, our operations have not been materially disrupted as a result of these military service obligations. Any disruption in our operations due to such obligations would adversely affect our ability to produce and market our existing products and to develop and market future products.
Risks Related to Our Indebtedness and Capital Structure
Our convertible senior notes (“Convertible Senior Notes”) may impact our financial results, result in the dilution of existing shareholders, create downward pressure on the price of our ordinary shares, and restrict our ability to take advantage of future opportunities.
On October 16, 2020, we closed an offering of $200 million aggregate principal amount of 0% Convertible Senior Notes due 2025 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The sale of the Convertible Senior Notes may affect our earnings per share figures, as accounting procedures may require that we include in our calculation of earnings per share the number of ordinary shares into which the Convertible Senior Notes are convertible. The Convertible Senior Notes may be converted, under the conditions and at the premium specified in the Convertible Senior Notes, into cash and our ordinary shares, if any (subject to our right to pay cash in lieu of all or a portion of such shares). If our ordinary shares are issued to the holders of the Convertible Senior Notes upon conversion, there will be dilution to our shareholders’ equity and the market price of our ordinary shares may decrease due to the additional selling pressure in the market. Any downward pressure on the price of our ordinary shares caused by the sale or potential sale of ordinary shares issuable upon conversion of the Convertible Senior Notes could also encourage short sales by third parties, creating additional downward pressure on our share price.
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Furthermore, the indenture for the Convertible Senior Notes will prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Convertible Senior Notes. These and other provisions in the indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable.
We currently anticipate that we will be able to rely on and to implement certain clarifications from the applicable Tax Authorities, with respect to the administration of our Israeli withholding tax obligations in relation to considerations to be paid to the holders of the Convertible Senior Notes upon their future conversion and settlement as well as other related tax aspects. Unexpected failure to ultimately obtain such anticipated clarifications from the Israeli Tax Authorities could potentially result in increased Israeli withholding tax gross-up costs.
We may not have the ability to raise the funds necessary to settle conversions of the Convertible Senior Notes, repurchase the Convertible Senior Notes upon a fundamental change or repay the Convertible Senior Notes in cash at their maturity, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Convertible Senior Notes.
Holders of the Convertible Senior Notes will have the right under the indenture governing the Convertible Senior Notes to require us to repurchase all or a portion of their Convertible Senior Notes upon the occurrence of a fundamental change before the applicable maturity date, at a repurchase price equal to 100% of the principal amount of such Convertible Notes to be repurchased, plus accrued and unpaid interest, if any. Moreover, we will be required to repay the Convertible Notes in cash at their maturity, unless earlier converted, repurchased or redeemed. We may not have enough available cash or be able to obtain financing at the time we are required to make such repurchases of the Convertible Senior Notes and/or repay the Convertible Senior Notes upon maturity.
In addition, we have the right to elect to settle conversions of the Convertible Senior Notes in cash.
Our ability to repurchase or to pay cash upon conversion of Convertible Senior Notes may be limited by law, regulatory authority or agreements governing our future indebtedness. Our failure to repurchase the Convertible Senior Notes at a time when the repurchase is required by the indenture or to pay cash upon conversion of the Convertible Senior Notes or at maturity as required by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Senior Notes or to pay cash upon conversion of the Convertible Senior Notes or at maturity.
The accounting method for the Convertible Notes could adversely affect our reported financial condition and results.
Under applicable accounting standards we separately account for debt and equity components of convertible notes that may be settled in cash. The carrying amount of the debt component was based on the fair value of a similar hypothetical debt instrument excluding the conversion feature, valued using an effective borrowing rate which was based on our synthetic credit risk. Issuance costs were allocated to the debt and equity components in proportion to the allocation of proceeds to those components. The difference between the principal amount of the Convertible notes and the amount allocated to the debt component was considered to be debt discount, which is subsequently amortized through non cash interest expenses over the expected life of the Convertible Notes.
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The amortization of debt discount and issuance costs that we expect to recognize for the Convertible Notes will result in lower reported income or higher reported loss. The lower reported income or higher reported loss resulting from this accounting treatment could adversely affect our reported or future financial results, the trading price of our ordinary shares and the Convertible Notes. In addition, under certain circumstances, convertible debt instruments (such as the Convertible Senior Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of ordinary shares that would be necessary to settle such excess, if we elected to settle such excess in shares, are included in the denominator for purposes of calculating diluted earnings per share.
In August 2020, the Financial Accounting Standards Board published an Accounting Standards Update (“ASU”) eliminating the separate accounting for the debt and equity components as described above. The ASU will be effective for public entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, early adoption is permitted but not earlier than fiscal years beginning after December 15, 2020. When effective, the elimination of the separate accounting described above may impact the amortization of debt discount and issuance costs that we expect to recognize for the Convertible Notes for accounting purposes. The ASU described above also eliminates the possibility of treasury stock method for convertible instruments such as the Convertible Notes (unless we make the relevant election eliminating the option to settle the principal amount of the relevant instrument in shares) and instead require application of the “if-converted” method. Under that method, diluted earnings per share would generally be calculated assuming that all the Convertible Notes were converted solely into ordinary shares at the beginning of the reporting period, unless the result would be anti-dilutive. The application of the if-converted method is expected to reduce our reported diluted earnings per share. Furthermore, if any of the conditions to the convertibility of the Convertible Notes is satisfied, then we may be required under applicable accounting standards to reclassify the liability carrying value of the Convertible Notes, as the case may be, as a current, rather than a long-term, liability. This reclassification could be required even if no noteholders convert their notes and could materially reduce our reported working capital.
Financial, legal, regulatory and taxation risks
Because most of our revenues are generated in U.S. dollars, but a significant portion of our expenses is incurred in currencies other than U.S. dollars, and mainly New Israeli Shekels, our profit margin may be seriously harmed by currency fluctuations.
We generate most of our revenues in U.S. dollars, but incur a significant portion of our expenses in currencies other than U.S. dollar, and mainly New Israeli Shekel, commonly referred to as NIS.
In addition, starting January 1, 2019, in accordance with ASC 842 of lease accounting standard, we are required to present a significant NIS linked liability related to our operational leases in Israel. As a result, we are exposed to risk of devaluation of the U.S. dollar in relation to the NIS and other currencies. In such event, the dollar cost of our operations in countries other than the U.S. will increase and our dollar measured results of operations will be adversely affected. During 2020, the U.S. dollar devaluated against the NIS by 7.0%, after being devaluated by approximately 10.1% in the previous three years. We cannot predict the future trends in the rate of devaluation or revaluation of the U.S. dollar against the NIS, and our operations also could be adversely affected if we are unable to hedge against currency fluctuations in the future.
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We participate in government programs under which we receive research and development grants. Some of these programs impose restrictions on our ability to use the technologies developed under these programs. The reduction or termination of these programs would increase our costs.
Until the end of 2016, we received royalty-bearing grants from the Israel Innovation Authority, or IIA (formerly known as the Office of the Chief Scientist of the Ministry of Economy and Industry, or the OCS), for the financing of certain of our research and development programs that meet specified criteria. Starting 2018, we also participate in IIA royalty free grant programs.
In addition, through the years, we participated in consortiums which are either solely managed by the IIA, or are joint consortiums of the IIA and the European Research Area. To maintain our eligibility for these programs, we must continue to meet certain conditions.
All these programs also restrict our ability to manufacture particular products and transfer particular technology, which were developed as part of the IIA’s programs, outside of Israel. The restrictions associated with these IIA’s programs may require us to obtain approval of the research and development committee nominated by the IIA for certain actions and transactions and pay additional payments to the IIA. Approval to manufacture products outside of Israel or consent to the transfer of technology, if requested, might not be granted and if granted, may increase our financial liabilities to the IIA. In addition, if we fail to comply with certain restrictions associated with formerly received IIA's funding, we may be subject to criminal charges.
We are further exposed to risks related to the receipt of funding from other governments or governmental agencies in connection with strategic development programs, under which we receive funding. Under such strategic development programs, governments and governmental agencies typically have the right to terminate the program’s funding at any time. In addition, a project may be terminated by a mutual agreement, if the parties determine that the project's goals or milestones are not being achieved. As a result, there is no assurance that these sources of external funding will continue to be available to us in the future. Moreover, under the terms of certain governmental funding programs in which we receive funding, the applicable granting agency has the right to audit the costs that we incur, directly and indirectly, in connection with such programs. Any such audit could result in modifications to, or even termination of, the applicable governmental funding program. Any adverse finding resulting from any such audit could lead to penalties (financial or otherwise), termination of funding programs, suspension of payments or other adverse consequences to our ability to receive governmental funding. In addition, obligations related to grants received from the IIA grants bear an annual interest rate based on the 12-month LIBOR. Currently, there is considerable uncertainty regarding the publication of LIBOR beyond 2021, and it is not possible to determine precisely whether, or to what extent, the replacement of LIBOR would affect companies' existing or future liabilities to the IIA.
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The application of tax laws is subject to interpretation and if tax authorities challenge our methodologies or our analysis of our tax rates it could result in an increase to our worldwide effective tax rate and cause us to change the way we operate our business.
The application of the tax laws of various jurisdictions to our international business activities is subject to interpretation and also depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The tax authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business does not achieve the expected tax consequences, which could result in tax and penalty payments and in an increase of our worldwide effective tax rate, and could adversely affect our financial position and results of operations.
A certain degree of judgment is required in evaluating our tax positions and determining our provision for income taxes. In the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. As we operate in numerous taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for tax authorities in different countries to have conflicting views. In addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. For example, the work being carried out by the OECD on base erosion and profit shifting as a response to increasing globalization of trade could result in changes in tax treaties or the introduction of new legislation that could impose an additional tax on businesses. As a result of changes to laws or interpretations, our tax positions could be challenged, and our income tax expenses could increase in the future.
For instance, if tax authorities in any of the countries in which we operate were to successfully challenge our transfer prices, they could require us to reallocate our income to reflect transfer pricing adjustments, which could result in an increased tax liability to us. In addition, if the country from which the income was reallocated did not agree with the reallocation asserted by the first country, we could become subject to tax on the same income in both countries, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it could increase our tax liability, which could adversely affect our financial position and results of operations.
We are subject to certain limitations related to the repatriation of funds that benefited from the tax exemption under the Approved and Benefited Enterprises, Preferred Enterprises and New Technological Enterprise Incentives regimes. The distribution or deemed distribution of such funds may be subject to recapture provisions under which we will be subject to the corporate tax that we were initially exempt from.
Until the end of 2015 we were eligible to receive certain tax benefits under Israeli law for capital investments as an Approved and Benefited Enterprise. In 2016, we made an election to receive tax benefits under Israeli law for capital investments as a “Preferred Enterprise”. Starting 2017, we made an election to receive Tax benefits under Israeli “Economic Efficiency Law” as a “Preferred Technological Enterprise”. While we believe that we meet the statutory conditions to entitle us to such benefits there can be no assurance that the tax authorities in Israel will concur to our position in general and for each specific year separately. We may be subject to additional taxes resulting from deemed dividend distribution of profits allocated to Approved Enterprise (Alternative Track) benefits, for example in case of a share repurchase or investment in foreign companies. Should it be determined that we have not, or do not meet such conditions, the benefits received would be cancelled. We would also be required to pay increased taxes or refund any benefits previously received, adjusted to the Israeli consumer price index and interest, or other monetary penalty. For additional information regarding Approved and Benefited Enterprise, Preferred Enterprise and Preferred Technological Enterprise see, “Item 10E. Taxation – Israeli Taxation” in this annual report on Form 20-F.
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It should be noted that the Israeli government may reduce or eliminate the above-mentioned benefits in the future. The termination or reduction of these grants or tax benefits could harm our financial condition and results of operations, and result in significantly higher fluent tax payment. In addition, if we increase our activities outside Israel due to, for example, future acquisitions or outsourcing of manufacturing or development activities, these activities generally will not be eligible for inclusion in Israeli grants or tax benefit programs. Accordingly, our effective corporate tax rate could increase significantly in the future.
We have historically generated losses and may incur future losses.
Since the year 2009, we have been able to demonstrate continued profitability, yet since our inception in 1993, we have had several years of losses and we may incur net losses in future years as well. We plan to increase our aggregate operating expenses in 2021 relative to 2020. However, our ability to generate profits is dependent mainly on our ability to generate sufficient sales. In the future, our sales may not be sufficient to cover the increase in our expenses and we may not be able to maintain profitability, mainly during a protracted slowdown.
We experience quarterly fluctuations in our operating results, which may adversely impact our share price.
Our quarterly operating results within a specific year can fluctuate significantly. A principal reason is that we derive a substantial portion of our revenue from the sale of a relatively small number of systems to a relatively small number of customers. As a result, our revenues and results of operations for any given quarter may decrease due to factors relating to the timing of orders, the timing of shipments of systems, and the timing of recognizing these revenues. Furthermore, our quarterly results are affected by the cyclical nature of the semiconductor capital equipment market and industries.
We also have a limited ability to predict revenues for future quarterly periods and, as a result, face risks of revenue shortfalls. If the number of systems we actually ship, and thus the amount of revenues we are able to record in any particular quarter, is below our expectations, the adverse effect may be magnified by our inability to adjust spending quickly enough to compensate for the revenue shortfall.
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Some of our contracts and arrangements potentially subject us to the risk of significant or non-limited liability.
We produce highly complex optical and electronic components and, accordingly, there is a risk that defects may occur in any of our products. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory and loss of potential sales. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects.
In our commercial relationship with customers, we attempt to negotiate waivers of consequential and indirect damages arising from damages for loss of use, loss of product, loss of revenue and loss of profit caused by our products. Similarly, with respect to our commercial relationship with subcontractors and suppliers, we attempt to negotiate arrangements which do not include a limitation of liabilities and limitation of consequential and in direct damages. However, some contracts and arrangements we are bound by expose us to product liability claims resulting in personal injury or death, up to an unlimited amount, and the incurrence of the risk of material penalties for consequential or liquidated damages. Additionally, under such contracts and arrangements, we may be named in product liability claims even if there is no evidence that our products caused the damage in question, and such claims could result in significant costs and expenses relating to attorneys’ fees and damages.
In addition, such contracts and arrangements may include non-limited liability provisions for infringement of a third party’s intellectual property rights in connection with our products.
Although we have not incurred in the past any material penalties for consequential or liquidated damages, we may incur such penalties in the future. Such penalties for consequential or liquidated damages may be significant (and so is the legal process conducted in connection with such penalties) and could negatively affect our financial condition or results of operations.
A large number of our ordinary shares continue to be owned by a relatively small number of shareholders, whose future sales of our shares, if substantial, may depress our share price.
If our principal shareholders sell substantial amounts of our ordinary shares, including shares issued upon the exercise of outstanding options or warrants, the market price of our ordinary shares may fall. For additional information on our major shareholders, see “Item 7A – Major Shareholders” in this annual report on Form 20-F.
Certain shareholders may control the outcome of matters submitted to a vote of our shareholders, including the election of directors.
To the best of our knowledge, approximately 35% of our outstanding ordinary shares are cumulatively held by five of our shareholders. As a result, and although we are currently not aware of any voting agreement between such shareholders, if these shareholders voted together or in the same manner, they would have the ability to control the outcome of corporate actions requiring an ordinary majority vote of shareholders as set in the Company’s Amended and Restated Articles of Association. Even if these shareholders do not vote together, each one of them may have the ability to influence the outcome of corporate actions requiring the vote of shareholders as set in the Company’s Amended and Restated Articles of Association. For additional information on our major shareholders, see “Item 7A – Major Shareholders” in this annual report on Form 20-F.
The market price of our ordinary shares may be affected by a limited trading volume and may fluctuate significantly.
In the past, there has been a limited public market for our ordinary shares and there can be no assurance that an active trading market for our ordinary shares will continue. An absence of an active trading market could adversely affect our shareholders’ ability to sell our ordinary shares in short time periods. Our ordinary shares have experienced, and are likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our ordinary shares without regard to our operating performance.
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In addition, the price of our ordinary shares could also be affected by possible sales of our ordinary shares by investors who view our convertible senior notes as a more attractive means of equity participation in our company, and by hedging and arbitrage trading activity that such investors may engage in.
We manage our available cash through various bank institutions and invest large portions of our cash reserves in bank deposits. A bankruptcy of one of the banks in which or through which we hold or invest our cash reserves, might prevent us to access that cash for an uncertain period of time.
We manage our available cash through various bank institutions and invest large portions of our cash reserves in bank deposits. As of December 31, 2020, substantially all of our cash reserves were invested in bank institutions, of which approximately 30% was invested in one institution. A bankruptcy of one of the banks in which we hold our cash reserves or through which we invest our cash reserves, might prevent us to access that cash for an uncertain period of time.
We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404 (Assessment of Internal Control), which started in connection with our Annual Report on Form 20-F for the fiscal year ended December 31, 2007, have resulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continued commitment of resources. Section 404 of the Sarbanes-Oxley Act of 2002 requires (i) management’s annual review and evaluation of our internal control over financial reporting and (ii) an attestation report issued by an independent registered public accounting firm on our internal control over financial reporting, in connection with the filing of our Annual Report on Form 20-F for each fiscal year. We have documented and tested our internal control systems and procedures in order for us to comply with the requirements of Section 404. While our assessment of our internal control over financial reporting resulted in our conclusion that as of December 31, 2020, our internal control over financial reporting was effective, we cannot predict the outcome of our testing in future periods. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.
Provisions of our Amended and Restated Articles of Association and Israeli law may delay, prevent or make difficult an acquisition of Nova, which could prevent a change of control and negatively affect the price of our ordinary shares.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, for special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See Exhibit 2.1 to this annual report on form 20-F, “Description of the Securities”. For a more detailed discussion regarding some anti-takeover effects of Israeli law.
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These provisions of Israeli law may delay, prevent or make difficult an acquisition of Nova, which could prevent a change of control and therefore depress the price of our shares.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our Amended and Restated Articles of Association and by the Israeli Companies Law, 1999 (the “Companies Law”). These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law each shareholder of an Israeli company has to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders and class meetings, on amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers, and transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company, or has other powers toward the company has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
Any shareholder with a cause of action against us as a result of buying, selling or holding our ordinary shares may have difficulty asserting a claim under U.S. securities laws or enforcing a U.S. judgment against us or our officers, directors or Israeli auditors.
We are organized under the laws of the State of Israel, and we maintain most of our operations in Israel. Most of our officers and directors as well as our Israeli auditors reside outside of the United States and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, if you wish to enforce a judgment obtained in the United States against us, or our officers, directors and auditors, you will probably have to file a claim in an Israeli court. Additionally, you might not be able to bring civil actions under U.S. securities laws if you file a lawsuit in Israel. We have been advised by our Israeli counsel that Israeli courts generally enforce a final executory judgment of a U.S. court for liquidated amounts in civil matters after a hearing in Israel. If a foreign judgment is enforced by an Israeli court, it will be payable in Israeli currency. However, payment in the local currency of the country where the foreign judgment was given will be acceptable, subject to applicable foreign currency restrictions.
Our shares are listed for trade on more than one stock exchange, and this may result in price variations.
Our ordinary shares are listed for trading on the Nasdaq Global Select Market and on the Tel Aviv Stock Exchange Ltd., or TASE. This may result in price variations. Our ordinary shares are traded on these markets in different currencies, U.S. dollars on the Nasdaq Global Select Market and New Israeli Shekels on the TASE. These markets have different opening times and close on different days. Different trading times and differences in exchange rates, among other factors, may result in our shares being traded at a price differential on these two markets. In addition, market influences in one market may influence the price at which our shares are traded on the other.
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Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.
In recent years, certain Israeli issuers listed on United States exchanges have been faced with governance-related demands from activist shareholders, as well as unsolicited tender offers and proxy contests. Although as a foreign private issuer we are not subject to U.S. proxy rules, responding to these types of actions by activist shareholders could be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our board of directors. The perceived uncertainties due to these potential actions of activist shareholders also could affect the market price and volatility of our securities.
We may be classified as a “passive foreign investment company” for U.S. income tax purposes, which could have significant and adverse tax consequences to U.S. shareholders.
Generally, if for any taxable year 75% or more of our gross income consists of specified types of passive income, or, on average, at least 50% of our assets are held for the production of, or produce, passive income, we may be characterized as a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes. Classification of Nova as a PFIC could result in adverse U.S. tax consequences to our U.S. shareholders, such as ineligibility for any preferential tax rates on capital gains or on dividends, interest charges on certain taxes treated as deferred, and additional reporting requirements under U.S. federal income tax laws and regulations. If we are a PFIC, it may be possible for U.S. holders of our ordinary shares to mitigate certain of these consequences by making an election to treat us as a “qualified electing fund” under Section 1295 of the Internal Revenue Code of 1986, as amended (the “Code”) or a “mark-to-market election” under Section 1296 of the Code. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares.
We believe that for our 2020 taxable year we were not a PFIC. Nonetheless, because the determination of whether we are, or will be, a PFIC for a taxable year depends on the application of complex U.S. federal income tax rules, which are subject to various interpretations, there is a risk that we were a PFIC in 2020. Absent one of the elections referenced above, if we are a PFIC for any taxable year during which a U.S. holder holds our ordinary shares, we generally will continue to be treated as a PFIC with respect to such U.S. holder in all succeeding years regardless of whether we cease to meet the PFIC tests in one or more subsequent years. Currently we expect that we will not be a PFIC in 2021 or subsequent years. However, PFIC status is determined based on our assets and income over the course of each taxable year, and is dependent on a number of factors, including the value of our assets, the trading price of our ordinary shares and the amount and type of our gross income. Therefore, there can be no assurances that we will not become a PFIC for the 2021 taxable year, or any future year, or that the Internal Revenue Service will not challenge any determination made by us concerning our PFIC status. For a discussion on how we might be characterized as a PFIC and related tax consequences, please see the section of this annual report entitled “Taxation - U.S. Taxation – Passive Foreign Investment Companies.” Investors should consult their own tax advisors regarding all aspects of the application of the PFIC rules to our ordinary shares.
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If a United States person is treated as owning at least 10% of our shares, such holder may be subject to adverse U.S. federal income tax consequences.
If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our shares, such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group. Because our group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries will be treated as controlled foreign corporations (regardless of whether we are or are not treated as a controlled foreign corporation). A United States shareholder of a controlled foreign corporation may be required to annually report and include in its U.S. taxable income its pro rata share of the controlled foreign corporation’s “Subpart F income”, “global intangible low-taxed income” and investments in U.S. property, whether or not such controlled foreign corporation makes any distributions. An individual that is a United States shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a U.S. corporation. A failure to comply with these reporting obligations may subject you to significant monetary penalties and may prevent the statute of limitations with respect to your U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist investors in determining whether any of our current or future non-U.S. subsidiaries are treated as a controlled foreign corporation or whether such investor is treated as a United States shareholder with respect to any of such controlled foreign corporations or furnish to any United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. The Internal Revenue Service provided limited guidance on situations in which U.S. shareholders may rely on publicly available information to comply with their reporting and tax paying obligations with respect to foreign-controlled CFCs. A United States investor should consult their own advisors regarding the potential application of these rules to its investment in the shares.
The Tax Cuts and Jobs Act of 2017 could adversely affect our business and financial condition.
On December 22, 2017, President Trump signed into law new legislation, known as the Tax Cuts and Job Act of 2017 (the “US Tax Act”), that significantly revises the Code. The US Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted taxable income (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the US Tax Act is uncertain, and our business and financial condition could be adversely affected. In addition, it is unknown if and to what extent various states will conform to the US Tax Act. The impact of the US Tax Act on holders of our ordinary shares is likewise uncertain and could be adverse. We urge our shareholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our ordinary shares.
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Item 4. Information on the Company
4.A History and Development of the Company
Nova Measuring Instruments Ltd. was incorporated in May 1993 under the laws of the State of Israel. We commenced operations in October 1993 to design, develop and produce integrated process control systems for use in the manufacture of semiconductors, also known as integrated circuits or chips.
In April 2000, we conducted an initial public offering and our shares were listed for trading on the Nasdaq stock exchange.
In June 2002, we listed our shares on the TASE, pursuant to legislation which enables Israeli companies whose shares are traded on certain stock exchanges outside of Israel to be registered on the TASE, while reporting, in substance, in accordance with the provision of the relevant foreign securities law applicable to the Company.
Until 2008, most of our products were sold to process equipment manufacturers such as Applied Materials, Inc. and Ebara Corp., which later sold these products to semiconductor manufacturers. Since then, we have changed our business model, selling substantially all of our products directly to semiconductor manufacturers. Through this process, which has also enabled us to introduce to these customers additional products and features, we have improved our products gross margins and net profitability.
In April 2015, we acquired ReVera Inc., a privately held company headquartered in Santa Clara, California, which develops, manufactures and sells stand-alone metrology tools for measurements of thin-films and composition applications in the semiconductor industry, and on December 31, 2017, we merged ReVera into its parent company, Nova Measuring Instruments, Inc.
We currently have five direct fully owned subsidiaries in the U.S., Japan, Taiwan, Korea and Germany.
Our headquarter office is located in Israel at 5 David Fikes St., 10th Floor, Rehovot.
4.A.8.
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov). The information is also available on our website (http://www.novami.com).
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4.BBusiness Overview
Our Company
Nova is a leading innovator and key provider of metrology solutions for advanced process control used in semiconductor manufacturing. Nova delivers continuous innovation by providing high-performance metrology solutions for effective process control throughout the semiconductor fabrication process. We bring pioneering metrology solutions to semiconductors process control, by industrializing lab and research-grade technologies and developing emerging metrology solutions. Nova’s product portfolio, deployed at the world’s largest integrated-circuit manufacturers, combines high-precision hardware and cutting-edge software, and provides its customers with deep insight into the development and production of the most advanced semiconductor devices. Nova’s capability to deliver innovative X-ray and Optical solutions enables its customers to improve performance, enhance product yields and accelerate time to market.
Nova’s market offering is driven by product divisions: The Dimensional Metrology Division (DMD) which is responsible for optical technology-based metrology solutions (integrated and standalone), and the Materials Metrology Division (MMD) which is responsible for x-ray-based solutions. The corporate units, such as marketing, next generation technology, human resources, finance and global business group, support both divisions. This structure allows the company to focus management attention on each product line separately, as well as to facilitate the integration of additional businesses or technologies in the future.
Our Market
Semiconductor Industry and the Metrology Market
The semiconductor manufacturing process starts with a flat silicon disc known as a silicon wafer upon which integrated circuits are constructed. To construct the integrated circuits, a series of layers of thin films that act as conductors, semiconductors or insulators are applied. During the manufacturing process, these film layers are subjected to processes which remove portions of the film, create circuit patterns and perform other functions. The semiconductor manufacturing process requires numerous precise steps and strict control of equipment performance and process sequences. Tight process control can be achieved through monitoring silicon wafers and measuring relevant parameters before or after each process step, with metrology tools.
The demand for our metrology systems is driven by capital equipment spending of the semiconductor manufacturers, which is in turn driven by the worldwide demand for semiconductor components embedded in technology devices. Industry data indicates worldwide demand for semiconductors will continue to grow, driven by the growing adoption of 5G and advanced network infrastructure, artificial intelligence (“AI”) and internet of things (“IoT”) applications, as well as network and data centers thriving through the work-from-home, learn-from-home, buy from home and gaming trends.
The growing investment in advanced technology nodes introduces growing complexity and new challenges into the semiconductor manufacturing process, as manufacturers are continuously pushed to improve performance and cost in order to gain competitive advantage. In a climate of constant growth, suppliers and manufacturers are asked to constantly come up with new products with greater functionality, better performance at lower prices. As a result, many new complex materials, advanced structures and processes are being introduced into the semiconductor manufacturing ecosystem. Environment of growing complexity in chip design and manufacturing set favorable business conditions for process control demand.
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The Semiconductor Manufacturing Process
Semiconductors devices typically consist of transistors, memory cells or other components connected by an intricate system of circuitry on silicon wafers. Integrated circuit manufacturing involves many individual steps, some of which are repeated several times, through which numerous copies of an integrated circuit are formed on a single silicon wafer. Because semiconductor specifications are extremely tight, and integrated circuits are becoming more complex, the process steps are constantly monitored, and critical parameters are measured at each step using metrology equipment. Key process steps, such as Deposition, Photolithography, Etch and Chemical-Mechanical Planarization, rely on metrology systems to monitor film thickness, uniformity, and critical dimensions and material characteristics, to ensure the correct result has been achieved.
The measurements taken by metrology systems during the manufacturing process help ensure process uniformity and help semiconductor manufacturers avoid costly rework and misprocessing, therefore increasing efficiency, yield and time to market.
The Need for Effective Process Control and Metrology Tools
Several technical and operational trends within the semiconductor manufacturing industry are strengthening the need for more effective process control and metrology solutions. These trends include
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Smaller IC Devices. The development of advanced smaller features means a larger numbers of integrated circuits per wafer. As feature geometries decrease, the manufacturing process tolerances decreases as well, and manufacturing yield becomes increasingly sensitive to processing deviations and defects. In addition, the increased complexity means higher chance of error during manufacturing, leading to additional inline monitoring and metrology steps.
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Transition to 3D Device. The transition to ever more complex 3D Integration technology, in order to improve performance, requires complex fabrication and as a result more sophisticated metrology solutions to be capable of measuring critical dimensions and materials properties in these 3D structures.
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Faster Time to Market. The accelerating rate of obsolescence of technology and the faster ramp to yield required by customers makes early achievement of high manufacturing yields a critical component of profitability and metrology has a critical role in achieving these demanding results.
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Materials Engineering. In order to overcome limitations in the continued shrink of transistor dimensions, which is used to improve performance, leading manufacturers are introducing new novel materials to IC production. New materials introduction requires new processing and metrology solutions in the atom level and thus represent a challenging development for the semiconductor manufacturing industry. It also representing a growing demand for more tighter materials control and therefore increasing demand for Materials Metrology solutions to control parameters such as composition, stress, ultra-thickness, crystallization and more.
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New Manufacturing Steps. Multiple Lithography technologies including multi-patterning and E-Beam are increasing the number of Etch and CMP process steps and EUV poses unique metrology challenges.
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Foundry Model. The rising investment needed for leading edge semiconductor process development and production, as well as the proliferation of different types of devices, lead to manufacturing increasingly being outsourced to foundries. A foundry typically runs several different processes and makes numerous different semiconductor product types in one facility. Since Foundries are running multiple products at the same time, the need for process control and metrology is increasing in order to qualify multiple devices on the same wafer at the same high process quality.
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Advanced Memory Technology (SSD). Memory manufacturers are going through technology evolution and build vertical devices to manage layers of NAND Memory. Such a complex device that can hold up to hundreds of thin high aspect ratio vertical layers requires significant changes in the manufacturing process. These changes require also many more steps to control through different Metrology solutions and increase the overall process control intensity for these High Aspect Ratio evolving structures.
In order to address the continuous increasing costs and challenges associated with these trends, semiconductor manufacturers must improve manufacturing procedures, production yields and time to market. Beyond improving the technology, introducing new process steps and innovative fabrication capabilities, Semiconductors manufacturers must tighten the control over the process and therefore must increase the Metrology intensity as well as introduce new innovative Metrology solutions. These new solutions will allow manufactures to overcome new challenges in dimensions and materials engineering.
The Semiconductor Market – Update
IC Insights forecasts the world GDP to decline by 4.4% in comparison to 2019, due to COVID-19 impact. They expect the global market to recover in 2021, with expected growth of 4.8% (The McCLEAN report 2021, published January 2021).
According to Gartner, semiconductor revenues are expected to grow by 11.6% in 2021, compared to growth of 7.3% in 2020. In addition, Gartner forecasts capital spending and wafer fab equipment to grow in 2021 by 6.3% and 7.8% respectively, following growth of 7.6% in CAPEX and 13.9% in WFE in 2020. (Gartner Forecast Semiconductor Wafer Fab Equipment, Worldwide, 4Q20 Update, published January 2021).
According to research reports, future demand drivers for semiconductors include 5G mobile devices, data center and cloud infrastructure, Artificial Intelligence, Augmented and Virtual Reality, Smart Sensors, internet-of-things and other electronic equipment.
Products & Technologies
Our product portfolio includes a complete set of metrology platforms suited for dimensional, films and material metrology measurements for process control across multiple semiconductor manufacturing process steps including lithography, Etch, CMP and deposition. Our offering is comprised of several key product lines, spanning multiple technologies and addressing key challenges in semiconductors process control from R&D to High-Volume-Manufacturing.
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Our strategy to offer holistic and diversified portfolio supports the industry’s frequent transitions, establishes the advantages and unique value we bring to our customers. With the introduction of new technologies and products, we cover a wider variety of applications, which increase our served and available markets and footprint in the semiconductor manufacturing industry.
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Technology |
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Product families |
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• Broadband Spectrophotometry • Scatterometry • Spectral Reflectometry • Imaging and Image Processing |
Optical CD Integrated Metrology |
Critical Dimensions Thin films |
Nova i5X0 (500, 550, 570) Nova 3090Next Nova 2040 |
|
Nova ASTERA | |||
|
Optical CD Stand-Alone Metrology |
Nova T-5X0 (500, 550. TLM) Nova T600 Nova MMSR, MMSR + | ||
|
• Spectral Interferometry |
Nova PRISM | ||
|
• X-Ray Photoelectron Spectroscopy • X-Ray Fluorescence |
Materials Stand-Alone Metrology (X-Ray) |
Thin film Composition |
Nova VERAFLEX III XF Nova VERAFLEX III+ Nova VERAFLEX IV |
|
• Raman Spectroscopy |
Materials Stand-Along Metrology (Optical) |
Strain Crystallinity Phases & Grains Defectivity |
Nova ELIPSON |
|
• Computational Modeling for Electromagnetic and Optical Systems |
Physical modeling (Modeling and Software Solutions) |
Nova Mars | |
|
• Machine Learning • Advanced Algorithms |
Mathematical modeling (Modeling and Software solutions) |
Nova FIT | |
|
• Big Data Analytics • High Power Computing |
Fleet Management (Modeling and Software solutions) |
Nova FM Nova FM+ Nova HPC QED |
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About the product lines
Optical CD Integrated Metrology
Nova is the leader in the space of integrated metrology with multiple generations of products. Our integrated metrology platforms enable advanced process control (APC) to monitor and control wafer to wafer variations of complex high-end CMP and Etch applications with high productivity and reliability required for the most advanced logic and memory technology nodes. Integrated metrology systems are directly integrated with manufacturing process equipment and provide semiconductor manufacturers with effective and efficient process control by measuring wafers within the process environment.
•
Nova i5X0 - the i5X0 family of integrated metrology (IM) platforms is Nova’s state-of-the-art and market leading IM solution targeting manufacturing of advanced logic and memory device technologies. Nova’s i5X0 platforms offer the highest productivity in the market, supporting fast CMP polishers and allowing within-wafer and within-die variation control. Enriched with Nova’s advanced modeling and algorithmic solutions, the i5X0 integrated metrology provides enhancements in metrology accuracy, precision and tool matching.
•
Nova ASTERA™ - the Nova ASTERA™ provides stand-alone level performance in a compact form factor of integrated metrology. Utilizing oblique and normal incidence channel measurements, Nova ASTERA™ provides a high level of accuracy, precision, tool matching and extendibility. Nova ASTERA™ is targeted to support the development of the most advanced device technologies, beyond 3nm Logic nanosheet architecture and 256 Layers, multi-deck 3D-NAND nodes.
Optical CD Stand-Alone Metrology
Nova’s stand-alone metrology platforms are utilized to characterize critical dimensions such as width, shape and profile with high precision and accuracy and are used in multiple areas of the fabrication process such as photolithography, etch, CMP and deposition steps. Nova’s stand-alone platform is targeted for critical dimensions (CD) and thin films measurements at the most advanced logic and memory technology nodes across all semiconductor leading customers. The expression “stand-alone metrology” generically describes free standing metrology equipment, which is located in line, i.e., next to the processing equipment measuring wafer samples in a station of its own. Nova’s stand-alone metrology product line is comprised of several platforms, ranging from normal channel only to multiple channels of information in one tool. Nova’s unique channels of information enables high metrology performance combined with high productivity. When incorporating Nova’s advanced suite of modeling and machine learning solutions, the Optical CD stand-alone platform provides cutting-edge performance for critical dimensions (CD) and thin films measurements of the most complex layer stacks and 3D structures.
•
Nova PRISM™ - Nova PRISM™ is Nova’s advanced dimensional standalone metrology platform targeted at the most complex device manufacturing technologies across the semiconductor segments. It combines revolutionary Spectral Interferometry (SI) and advanced modeling technology with state-of-the-art multi-channel optical techniques that create wide and unique spectral information offering. Nova PRISM™ delivers invaluable metrology performance that enables our customers to deliver of the most advanced technologies at the highest yield and quality.
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Modeling and Software Solutions
All of Nova’s hardware products are combined with our suite of advanced algorithms and software modeling solutions. Nova’s software modeling solutions combine top notch algorithms in the field of Artificial Intelligence and machine learning. Nova’s suite of software modeling products is comprised of Nova MARS® physical and geometrical modeling and Nova FIT™ data driven machine learning modeling solutions. These solutions are supported by Nova HPC®, a computational management layer, which also serves as the foundation for Nova’s Centralized Fleet Management and Control. Our comprehensive software modeling portfolio provides customers with a complete modeling and application development solution designed for complex 3D and HAR structures in the most advanced logic and memory technology nodes.:
•
Nova MARS® - Nova MARS® software package is a multi-channel metrology modeling engine designed for the most advanced 3D structures in advanced process nodes of semiconductor manufacturing. It’s a complete modeling solution for scatterometry and interferometry models’ development, material characterization and recipe optimization which is crucial for facing increasing challenges in semiconductor metrology. The Nova MARS® also injects physical and process related knowledge to solve complex structures.
•
Nova FIT™ - Nova FIT™ modeling suite compliments traditional modeling of Optical Critical Dimensions by machine learning and data driven algorithmic solutions. The algorithmic suite works in conjunction with Nova MARS® physical modeling engine and Nova’s fleet management solution to improve metrology performance, speed up time to solution and expand metrology envelope for enriched process control. Nova FIT™ embeds advanced machine learning and big data architecture into optical modeling, enhancing the way customers utilize metrology measurement data to tighten process windows, avoid process excursions and improve yield.
•
Nova’s Centralized Fleet Management and Control - Nova’s Fleet Management and Performance Monitoring Center simplify the management and enhance the productivity of Nova tools in the fabrication site. The platform’s ability to process and analyze large amounts of fleet and metrology data using advanced data analytic tools provides our customers with intelligent and predictive insights on tool performance and process trends.
•
Nova HPC® - The Nova HPC® is a High-Performance Computing solution, which is designed to accelerate NovaMARS® and NovaFIT™ work processes. Nova HPC® significantly expedites application development by accelerating library-building, real time regression and recipe-setting processes. Its advanced computing hardware design enables optimization of Nova’s proprietary algorithm performance, thus enabling the most calculation-demanding application development.
Materials Stand-Alone Metrology
Materials are considered the next frontier in advancing integrated circuits beyond dimensional and architectural scaling. The growing usage of complex and novel materials in advanced technology nodes has increased the demand for metrology solutions that can measure materials properties, In Line and In Die, with high precision and accuracy. Nova’s materials metrology offering utilizes powerful X-Ray and Raman technologies that have been optimized to provide the automation, speed and reliability required in today’s advanced semiconductor production environment. As part of Nova’s strategic plan, Nova intends to increase its focus on the evolving materials engineering market. The demand to precisely characterize and control materials composition, thickness, stress and more, is growing in advanced Memory and Logic nodes and requires innovative metrology solutions. Our Nova ELIPSON™ and The VeraFlex® platforms aim to provide such capabilities.
•
VeraFlex® - Nova’s VeraFlex® combines enhanced XPS (X-Ray photoelectron spectroscopy) capability with a unique low energy XRF (X-Ray fluorescence) channel to address logic and memory device fabrication challenges. This innovative inline technology is a surface-sensitive quantitative spectroscopic technique that is used to determine the elemental composition of thin films.
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•
Nova ELIPSON™ - Nova ELIPSON™ utilizes Raman spectroscopy, a vibrational spectroscopy technique, to detect multiple material properties such as strain, crystallinity, phases, grain size and composition. The combination of a small spot and high speed of this non-destructive, optical method makes it a metrology of choice for both memory and logic segments.
Our Customers, Sales and Marketing
Our sales and marketing strategy is based mostly on direct sales channels where we engage with our customers from the early stages of process development, to address their challenges in the development phase, and later on support their technology transition to high volume production. We seek to establish and maintain tight cooperative relationships with our customers by consistently providing them with a high level of service, support and new capabilities. We have a global network of sales and marketing, customer service and applications support offices worldwide. Our teams are empowered by frequent trainings, remote support options, online resources and rich marketing collateral.
We serve all leading manufacturers in the logic, foundry and memory sectors of the integrated circuit manufacturing industry. Our e customers are located across Asia, Europe and North America.
For the distribution of our total revenues, from products and services, by geographic areas, see Note 12A to our consolidated financial statements.
The semiconductor industry is dominated by a small number of large companies. As a result, our sales are highly concentrated among a relatively small number of customers. The following table indicates the percentage of our total revenues derived from sales to our five largest customers and the range of these revenues from these customers for the periods indicated.
|
2018 |
2019 |
2020 | ||||||||||
|
Total revenues from five largest customers |
66 |
% |
67 |
% |
72 |
% | ||||||
|
Range of revenues from five largest customers |
5%-20 |
% |
3%-27 |
% |
8%-26 |
% | ||||||
Competition
The industries in which Nova operates are highly competitive and characterized by rapid technological change. Nova’s ability to compete generally depends on its ability to introduce competitive solutions, commercialize its technology in a timely manner, continuously improve its products, and develop new products that meet the evolving customer requirements. Significant competitive factors include technical capability and differentiation, productivity, cost-effectiveness and the ability to support a global customer base. The importance of these factors varies according to customers’ needs, including product mix and respective product requirements, applications, and the timing and circumstances of purchasing decisions. Substantial competition exists in all areas of Nova’s business.
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Competitors range from small companies that compete in a single region, which may benefit from policies and regulations that favor domestic companies, to global, diversified companies. Nova’s ability to compete requires a high level of investment in R&D, marketing and sales, and global customer support activities.
Research and Development
We have assembled a core team of experienced scientists and engineers who are highly skilled in their particular field or discipline. Our research and development core competencies, technologies and disciplines are in scatterometry, thin film metrology, XPS, interferometry, Raman Spectroscopy metrology and semiconductor process control, and include multidisciplinary measurement instruments, complex system engineering, algorithms, physical modeling, optical design, interpretation software, machine learning, image acquisition, pattern recognition, X-ray energy sources, electron optics and detection, vacuum systems and equipment integration. Our research and development staff consist of about 300 highly skilled members, approximately 70 of whom hold Ph.D.’s. In addition, we rely on independent subcontractors and consultants in various fields. Since June 2003, our research and development operations in Israel are certified for ISO 9001 quality standard (Current ISO 9001:2015 version).
The metrology and process control market is characterized by continuous technological development and product innovations. We believe that the rapid and ongoing development of new products and enhancements to our existing product lines is critical to our success. Accordingly, we devote a significant portion of our technical, management and financial resources to developing innovative products, new applications and emerging innovative technologies.
Our vision is to continue to be an innovative leader in the semiconductor process control market, through increasing our leadership in the Dimensional and Materials metrology solutions, and our research and development efforts and activities are designed to support this vision. Our research and development efforts are structured through different and separate development projects, which are initiated following a detailed project plan, technical feasibility, and risk analysis. The main projects are monitored throughout their life cycle in a structured process, including design reviews and project management reviews.
In the frame of our research and development activities we participate from time to time in development consortium arrangements, which also help us to support our customers in the transition to advance technology nodes. These consortia are joint collaboration programs with other semiconductors companies and are supported and funded by the IIA and\or European Joint Research. It should be noted, that in order to maintain our eligibility for these programs, we must continue to meet certain conditions. These programs might restrict our ability to manufacture particular products and transfer particular technology, which were funded by the IIA. For additional information, see “Item 5C - Grants from the Israel Innovation Authority & European programs” in this annual report on Form 20-F.
As part of our long-term technological collaboration, we are also engaged with joint development activities with some of our strategic customers, as well as with research institutes and other semiconductor companies. These activities sometimes impose limitations on the joint intellectual property developed as part of these programs.
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Patents and Other Proprietary Rights
Our continued success depends upon our ability to protect our core technology and intellectual property. We therefore have an extensive program devoted resources to seeking patent protection for our inventions and discoveries that we believe will provide us with competitive advantages. Our patents and applications principally cover various aspects of optical measurement systems and methods, integrated process control implementation concepts, and optical, opto-mechanical and mechanical design. In addition, our patents and applications cover various aspects of X-ray based measurement systems and methods, including process control implementation concepts, X-ray energy sources, electron optics and detection, vacuum systems and equipment integration. To protect our proprietary rights, we also rely on a combination of copyrights, trademarks, trade secret laws, contractual provisions (e.g. confidentiality agreements) and licenses. Our copyrights include software copyrights. We constantly seek to control access to, and distribution of our proprietary information, such as our proprietary algorithms. We enter into confidentiality and proprietary rights agreements with our employees, consultants and business partners, and we control access to and distribution of our proprietary information.
Our in-house know-how is an important element of our intellectual property. The development and management of our products requires sophisticated coordination among many specialized employees. We believe that duplication of this coordination by competitors or individuals seeking to copy our products would be difficult. The risk of a competitor effectively replicating the functionality of our products is further mitigated by the fact that most of the core technology operating on our systems is not exposed to a user or to our competitors. To protect our technology, we implement multiple layers of security.
Despite our efforts to protect our proprietary rights, competitors may be able to develop similar technology independently or design around our patents and, despite our efforts, our trade secrets may be disclosed to others. Furthermore, the laws of countries other than the U.S. may not protect our intellectual property to the same extent as the laws in the U.S. We also cannot assure that: (i) our pending patent applications will be approved; (ii) any patents granted will be broad enough to protect our technology or provide us with competitive advantages or will not be successfully challenged or invalidated by third parties; or (iii) that the patents of others will not have an adverse effect on our ability to do business. We may also have to commence legal proceedings against third parties to protect our intellectual property.
From time to time, we receive communications from others asserting that our products infringe or may infringe their intellectual property rights. Typically, our in-house patent counsel investigates these matters and, where appropriate, retains outside counsel to provide assistance. We are not presently involved in any material legal proceedings in which a third party has asserted that we have violated their intellectual property rights. If, however, we become involved in any such litigation and its outcome is adverse to us, it may result in a loss of proprietary rights, subject us to significant liabilities, including treble damages in some instances, require us to seek licenses from third parties which may not be available on reasonable terms or at all, or prevent us from selling our products. Furthermore, any litigation relating to intellectual property, even if we are ultimately successful, could result in substantial costs and diversion of time and effort by our management. This in and of itself could have a negative impact on us. While we believe that we would be successful in any litigation seeking to enforce our patent rights, the ultimate outcome of any litigation or other legal proceedings cannot be predicted.
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Manufacturing
We have one manufacturing facility for our Optical CD product lines, which is located in Ness-Ziona, Israel, and one manufacturing facility for our X-ray product line, which is located in Fremont, CA, US. In addition, we are expected to expand our production and development capabilities with a new state-of-the-art clean room in Rehovot Israel. We are now in the process of designing a highly advanced clean room facility that will support the company’s newly introduced technologies and continuous growth. The new clean room is expected to become operational during 2022. The new clean room facility is planned for manufacturing Nova’s most advanced platforms by utilizing state-of-the-art production methods. As part of Nova’s corporate social responsibility, the construction will also support high sustainability standards.
Our principal manufacturing activities include assembly, integration, final testing and calibration. Our production activities are conducted in our manufacturing and repair center facility in Israel and in Fremont. We rely and expect to continue to rely on subcontractors and turnkey suppliers to fabricate components, build subassemblies and perform other non-core activities in a cost-effective manner. While we use standard components and subassemblies wherever possible, most mechanical parts, metal fabrications, optical components and other critical components used in our products are engineered and manufactured to our specifications. A small portion of these components and subassemblies are obtained from a limited group of suppliers, and occasionally from a single source supplier.
In order to leverage the relatively high volume of systems we manufacture, and in order to decrease production costs, we continue to focus our internal manufacturing activities on processes that add significant value or require unique technology or specialized knowledge and outsource others. Our site in Israel received the ISO 9001 quality mark by an international certification institute in October 1999. Since then, we have upgraded our quality systems to conform to ISO 9001:2015 requirements. We received the formal certification of ISO 14001 in 2010 which was upgraded to ISO 14001:2015 in 2016 and in 2014 we received the formal certification of OHSAS 18001:2007 for our manufacturing operations in Israel which was upgraded to ISO 45001 in 2019. We are being annually recertified for these standards.
Corporate Social Responsibility (CSR)
In 2020 we have embraced a New Corporate Social Responsibility Strategy. We are determined to play a vital role in creating a world that values equality, safety and environmental health for the benefit of future generations to come. We are committed to proactively invest in embedding social responsibility as part of our culture and business management to support our values. Our CSR commitment is Inspired by Nova’s DNA and values, of respecting every individual, fostering partnerships and teamwork and seeing impossible as our starting point.
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Built on our unique organizational culture where our employees feel safe and respected, with a strong sense of belonging and self-worth, Nova now strives to provide members of the community with resources to achieve the same. We invite our stakeholders into our socially responsible ecosystem, built on the foundations of our ethical, social and environmental goals and execution, and hold them to the highest standards. Together with our excellent people and devoted partners – we set out to generate true change by making a difference in people’s lives.
Our strategy is built on five pillars:
|
Environment |
Building a Sustainable Future We strive to play our part in building a better future by protecting our environment and making a positive impact on the planet for the next generations to inherit. |
|
Community Relations |
Lifting our Communities We welcome members of the community into our family and provide them with the resources required to promote equality, belonging and self-worth |
|
Diversity |
Expanding Cultural Diversity We’re committed to building a diverse organization with a unique sense of belonging. We strive to expand our multidisciplinary platform with diverse talents and inspire the various segments of society. |
|
Inclusion |
Empowering Every Voice Our organization fosters an inclusive, open-minded and accepting environment. We respect all individuals and ensure everyone is seen, heard, feel valued and respected. |
|
Ethics & Governance |
Championing our Employees People at Nova always come first. We strive to create an ethical, safe and motivational workplace for our employees, one in which they belong, while their privacy, interests and well-being are protected. |
In an effort to contribute to the sustainable development of society and to create new corporate value, we have addressed certain environmental issues. With respect to the environment, our new headquarters located in Rehovot, Israel is certified as “Leed Gold” - LEED (Leadership in Energy and Environmental Design), which is a widely used green building rating system and provides a framework for healthy, highly efficient, and cost-saving green buildings. LEED certification is a globally recognized symbol for sustainability achievement and leadership. In addition, we are committed to responsible sourcing of minerals and have taken action to both increase transparency in our supply-chain and ensure responsible procurement by our suppliers and sub-suppliers. We conduct conflict minerals due diligence pursuant to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. In general, our production does not involve industrial waste, and any waste that is created from used metal and electronics components is being processed through authorized companies. We also implemented recycling measures in our facilities, and we use a mechanism for electricity saving in our offices.
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Our Social responsibility is guided by our values and propels our culture to higher levels. In 2019 we moved our headquarters to a different facility in order to create better working conditions and advanced accessibility options for the disabled. We hold an annual safety program which includes training and safety drills for our employees and instituted a safety committee which is convened on a monthly basis to discuss safety measures. In 2020, we strived to recruit and promote an equal employment opportunity workforce. We built new strategic partnerships to ensure our open positions are exposed to new diverse populations. With the help of our most valuable assets, our employees, we make a significant impact on our community by mentoring and tutoring projects together with numerous non-profit organizations worldwide. Our employees regularly participate in voluntary activity meant to make a difference in the lives of those in need.
Since the COVID-19 outburst, we have been directing efforts, energies and much thought into helping the community around us during one of the most challenging periods we have ever known. We managed to donate funds to underprivileged families to enable their children to take part in "remote learning". Nova also donated newly purchased tablets to Children-Oncology unit in several hospitals. Additionally, and specifically in this period, we donated money for kids’ treatments at Shiba hospital. Through the pandemic spread we also supported our Chinese customers and community and donated masks and protective gear to hospitals and sites in China. In the US, we donated to our local food bank to support those who lost their jobs or were affected by COVID-19.
For details of our other corporate governance policies and practices, please refer to the following items in this report - Item 6. Directors, Senior Management and Employees, and Item 16G. Corporate Governance.
Capital Expenditures
Our capital expenditures are primarily for network infrastructure, computer hardware and software, leasehold improvements of our facilities, expansion of clean room facilities and demonstration and development tools. None of these assets are held as collateral or guarantee other obligations. For additional information on our capital expenditures, see “Item 5B. Liquidity and Capital Resources” in this annual report on Form 20-F.
Government Regulation
For information relating to the impact of certain government regulations on our business, see “Item 5.C – Grants from the Israel Innovation Authority” on this annual report on Form 20-F.
4.C Organizational Structure
Our Subsidiaries
Our subsidiaries and the countries of their incorporation are as follows. All of our subsidiaries are wholly owned by the Company:
|
Name of Subsidiary |
Country of Incorporation |
|
| |
|
Nova Measuring Instruments, Inc. |
Delaware, U.S. |
|
Nova Measuring Instruments K.K. |
Japan |
|
Nova Measuring Instruments Taiwan Ltd. |
Taiwan |
|
Nova Measuring Instruments Korea Ltd. |
Korea |
|
Nova Measuring Instruments GmbH |
Germany |
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4.DProperty, Plant and Equipment
Our main facilities, located in Rehovot and Ness-Ziona, Israel, are currently occupying an aggregate of approximately 13,000 square meters, including: approximately 2,000 square meters of production facilities, approximately 5,700 square meters of research and development offices (including approximately 1,400 square meters of laboratories) and approximately 5,000 square meters of headquarters, operations, sales and marketing, service and support and administration facilities.
In September 2019, our Israel headquarters moved to a new building at the Science Park in Rehovot. The lease agreement in Rehovot is expected to extend until 2029. We have the option to extend this lease period by two periods of five years each, subject to customary conditions. The lease period for an additional space of approximately 2,000 square meters in Rehovot, is expected to begin in 2021 and will extend through the same lease periods.
The lease agreement in Ness Ziona is expected to extend until January 31, 2026. In 2020 we have terminated the lease of approximately 5,700 square meters of the facilities in Ness Ziona, which are no longer required for our operations.
Our subsidiaries lease offices in various locations, for use as a research and development, manufacturing, service and pre-sale facility (depending on each subsidiary’s needs). During 2019, our U.S. subsidiary, Nova Measuring Instruments, Inc. has moved into approximately 3,800 square meters of a newly leased space, which includes approximately 850 square meters of production facilities. This facility lease will expire on March 31, 2026 (with, at Nova Measuring Instruments, Inc.’s sole discretion, a right to extend the lease period for an additional five years). Our Taiwanese subsidiary leases a new space of approximately 1,750 square meters which includes a cleanroom facility, our Korean subsidiary leases approximately 1,000 square meters, our European subsidiary leases approximately 200 square meters in Germany and France, and our Japanese subsidiary leases approximately 100 square meters.
We believe that our facilities and equipment are in good operating condition and adequate for their present usage.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
Information in this Operating Review and Financial Prospects Section should be read in conjunction with our consolidated financial statements and notes thereto which are included elsewhere in this report.
Executive Overview
Nova is a leading innovator and key provider of metrology solutions for advanced process control used in semiconductor manufacturing. Nova delivers continuous innovation by providing state-of-the-art high-performance metrology solutions for effective process control throughout the semiconductor fabrication lifecycle. We bring pioneering metrology solutions to the world of process control, by industrializing lab and research-grade technologies and developing emerging metrology solutions. Nova’s product portfolio, deployed by the world’s largest integrated-circuit manufacturers, combines high-precision hardware and cutting-edge software, provides its customers with deep insight into the development and production of the most advanced semiconductor devices. Nova’s unique capability to deliver innovative X-ray and Optical solutions enable its customers to improve performance, enhance product yields and accelerate time to market. We market and sell our metrology systems mainly to semiconductor manufacturers, and in some cases to semiconductor process equipment manufacturers.
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Our business is greatly affected by the level of spending on capital equipment by semiconductor manufacturers. In addition, demand for our products and services is affected by the timing of new IC capacity expansion and ramping up of new technology nodes, by the timing of releasing products by us and our competitors, market acceptance of our new or enhanced products and changes or improvements in semiconductor design or manufacturing processes.
In the recent five years (2016-2020), we were able to achieve positive Compound Annual Growth Rate (CAGR) of products revenues of approximately 13%, while Gartner Inc. estimates that the Process Control segment has achieved a CAGR of approximately 11% (Gartner Q4-2020 forecast, published on December 22, 2020). During these years, we successfully diversified our technology to include X-Ray capabilities on top of our Optical technology, to measure both Dimensional and Material parameters, we added advanced machine learning algorithms on top of our physical modeling, and we advanced our traditional tool set to include advanced capabilities in both hardware and software. We also diversified our revenue mix across semiconductor segments and territories. During these years, we were also able to increase our total available market through development of new technologies used for Materials and Dimensions metrology, addressing emerging applications in Memory and Foundry/Logic.
In 2020, product sales accounted for approximately 77.7% of our total revenues, and services accounted for approximately 22.3%.
As of the end of 2020, we had cash reserves, net of long term debt related to convertible bonds, of approximately $249.1 million, and working capital of approximately $497.8 million.
Our service organization is operating on a profit and loss basis and the objectives of our service organization are defined and measured by: customer satisfaction, quality support parameters; and by profit and loss criteria. The service organization provides support to all products we sell, during both the warranty period and the post warranty period. Service revenues are mostly driven by extended warrant, Time and Materials requests, service contracts and proactive sales to the install base to improve productivity and metrology capabilities.
Significant Events in 2020 and Outlook for 2021
During 2020, we demonstrated several significant achievements:
•
Balanced geography distribution that yielded three large territories.
•
Diversified customer mix, including several major customers accounting for 10% or more of products’ revenues.
•
Balanced revenue mix between Memory and Foundry/Logic.
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•
Further market adoption of Nova’s advanced portfolio by leading wafer fabrication customers:
o
Hardware and Software coupling
o
Unique Optical and X-Ray solutions
o
Holistic offering, including Integrated and Standalone metrology
•
Continued investments in research and development programs aimed to generate new organic growth engines.
•
Introduction of several new generation Dimensional and Materials metrology platforms. We also continued rolling out Machine Learning mathematical algorithms to enhance metrology measurements and to complement the traditional Physical modeling.
o
Introduction of new generation tools in both Integrated and Standalone Optical CD
o
Introduction of NovaPrism™ – NovaPRISM™ is targeted at the most complex device manufacturing across the semiconductor segments. The solution combines revolutionary Spectral Interferometry (SI) technology with state-of-the-art multi-channel optical techniques enabling wide and unique spectral information offering.
o
Introduction of ELIPSON™ – Nova ELIPSON™ is a high-end standalone metrology system, optimized for measuring material properties such as composition, strain, crystallinity and surface properties, for both memory and logic segments. The platform utilizes Raman spectroscopy for Optical Material Metrology (OMM) to extract material properties of the areas under analysis.
•
Deepening collaboration with several research institutes and customers' development centers, utilizing a variety of our products, leading to our positioning as a long-term technology development and high-volume manufacturing partner.
•
On October 2020, Nova concluded a pricing of $200 million aggregate principal amount of 0% Convertible Senior Notes due 2025 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The raised funds will be utilized for further investment in the company growth and resiliency in order to enhance shareholders value.
•
CSR (Corporate Social Responsibility) – during 2020 we have built & embraced a New Corporate Social Responsibility Strategy. We are determined to play a vital role in creating a world that values equality, safety and environmental health for the benefit of future generations to come. We are committed to proactively invest in embedding social responsibility as part of our culture and business management to support our values.
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In 2021, we plan to focus on the following:
•
Continue to strengthen our competitive and market position, through unique innovation and technical leadership.
•
Continue our aggressive innovation and development plans for meeting future industry challenges.
•
Expand our total available market by addressing new emerging metrology applications and market segments, through solutions delivery to the challenging buildup of advanced Logic technology nodes, memory scaled VNAND nodes and DRAM scaled devices at leading edge customers.
•
Continue delivery of advanced metrology systems to the trailing edge technology nodes to support new applications ramp up.
•
Continue our progress to meet Nova’s long-term strategic plan, which defines the Company’s growth path in revenue, customers, technology and financial performance, to support our profitable growth.
•
Continue leading the emerging metrology markets with innovative and disruptive solutions.
•
Continue the collaborations and joint research programs with leading semiconductor manufacturers and relevant leading research institutes.
•
Continue our products innovation and diversification through several new product introductions to extend the Company’s market leadership and total available market.
•
Continue our aggressive plans to generate revenues and competitive edge through SW algorithm products.
•
Strengthening the partnership with our customers and build a “Customer Centric” approach to accommodate and deliver customers’ requirements along the semiconductor lifecycle.
The challenges and risks Nova faces in meeting its plans include:
•
Meeting strategic, development, operational and delivery targets in light of the COVID-19 global pandemic and the various influences across the world.
•
On time delivery of the required solutions to meet the current and future needs of our existing and new customers.
•
Correctly understanding the market trends and competitive landscape to ensure our products retain proper differentiation to win customer confidence.
•
Creating aggressive, innovative and competitive roadmap deliverables at reasonable costs in order to properly control expenses.
•
Identifying the metrology evolution roadmap for future industry needs to meet process control requirements and lead the market.
•
Achieving long-term growth targets while supporting global extensive growth in all our activities.
•
Building a solid infrastructure to accommodate further growth.
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In order to address the risks and challenges associated with the COVID 19 pandemic Nova implemented a thorough and detailed global plan to secure the employees safety and health, guarantee supply chain resiliency, assure business continuity and continuous support to our customers.
In order to address the technical and roadmap risks and challenges, we are working closely with leading customers’ development and research groups and with the leading process equipment manufacturers as well as with leading technology research institutes. The purpose of working closely with these entities is to receive as early as possible information and feedback on their current and future metrology and process control needs and tune our roadmap to support such needs.
It is our belief that Nova has been able to consistently improve its market position as a result of a combination of factors:
•
Optical metrology has become an enabler for the entire industry over the last few years, sometimes on the account of other metrology capabilities.
•
Material Metrology has been widely adopted by leading memory and logic/foundry customers.
•
Nova’s unique metrology portfolio, combining Optical and X-Ray metrology for both dimensions and materials, provide the most advanced solution, combining the best innovative metrology capabilities with the best cost of ownership.
•
The ability to provide a unique and differentiated technology portfolio sets Nova apart from the competition and adding a competitive edge to our offering.
•
Our solutions are well accepted by leading customers that allow us to gain more market share with additional process steps and new applications.
•
Our ability to closely team with our customers allows us to predict the industry evolution and process control challenges and by that introduce innovative and advanced metrology solutions to solve industry needs.
•
Our diversified portfolio, which is a result of continuous investment in research and development, is becoming more attractive to our customers.
•
Extending our solutions’ base to include hardware and software elements in a coupled offering.
•
Well controlled P&L and operating model to support our profitable growth plans and operational resiliency.
Understanding the industry’s challenges for the next several years, it is our belief that we should continue our long-term growth as the adoption of our solutions increases as a function of process complexity and industry development. We believe that our served addressable market is continuously expanding as we penetrate to more steps of the semiconductor manufacturing processes and, as we continue innovating our portfolio for leading new emerging metrology opportunities. We also believe that going forward, as the semiconductor process is becoming much more complicated with variety of challenges, the necessity for our unique portfolio, combining multiple technologies for both Materials and Dimensional metrology, will grow in the next few years.
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Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with the United States of America generally accepted accounting principles. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Use of Estimates – General
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our management evaluates its estimates on an ongoing basis, including those related to, but not limited to income taxes and tax uncertainties, collectability of accounts receivable, inventory accruals, fair value and useful lives of intangible assets, and revenue recognition. These estimates are based on management's knowledge about current events and expectations about actions the Company may undertake in the future. Actual results could differ from those estimates.
Revenue Recognition
Under ASC 606, the company derives revenue from the sales of advanced process control systems, spare parts, labor hours (mainly systems installation) and service contracts.
Revenues derived from sales of advanced process control systems, spare parts and labor hour are recognized at point in time, when control of the promised goods or services is transferred to the customers, upon fulfillment of the contractual terms.
Revenues derived from service contract, which generally specify fixed payment amounts and contractual terms for periods longer than one month, are recognized ratably over time.
The amount recognized reflects the consideration that the Company expects to be entitled to in exchange for those performance obligations.
Revenues from sales which were not yet determined to be final sales due to acceptance provisions are deferred.
Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative Standalone Selling Price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
The Company enters into revenue arrangements that includes products and services which are generally distinct and accounted for as separate performance obligations. The Company determines whether arrangements are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the Company's commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract.
47
Inventories
We carry our inventory at the lower of either the actual cost or the net realizable value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twenty-four months. As demonstrated in the past, demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand, which could lead to losses. In addition, our industry is characterized by rapid technological change, frequent new product developments, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.
Goodwill
Goodwill and other purchased intangible assets have been recorded as a result of the acquisition of ReVera. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired, and related liabilities. Goodwill amount on December 31, 2020 was $20.1 million.
Goodwill is not amortized, but rather is subject to an impairment test. In accordance with ASC 350, “Intangibles – Goodwill and Other”, at least annually (in the fourth quarter), or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Company has an option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value prior to performing the quantitative goodwill impairment test. The Company operates in one operating segment, and this segment comprises its only reporting unit.
Following the adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment", as part of the quantitative goodwill impairment test, any excess of the carrying value of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to the fair value of the reporting unit. For the year ended December 31, 2020, we performed an annual impairment analysis, and no impairment losses have been identified.
Intangible assets
As a result of the acquisition of ReVera in April 2015, our balance sheet included acquired intangible assets, in the aggregate amount of approximately $7.6 million and $5.1 million as of December 31, 2019 and 2020, respectively.
In 2015, we allocated the purchase price of ReVera to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. These valuations require management to make significant estimations and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include future expected cash flows from technology acquired, backlog and customer relationships. Management’s estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
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Intangible assets are comprised of acquired technology, customer relations, backlog and IP R&D.
For the year ended December 31, 2020, we performed an annual impairment analysis for Goodwill, and no impairment losses have been identified.
Accounting for income tax
We are subject to income taxes in Israel, the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made.
We have accounted for the tax effects of the Tax Cuts and Jobs Act, which we refer to as the Tax Act, enacted on December 22, 2017, on a provisional basis. Our accounting for certain income tax effects is incomplete, but we have determined reasonable estimates for those effects. Our reasonable estimates are included in our financial statements as of December 31, 2020.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Convertible senior notes
The Company accounts for its convertible senior notes in accordance with ASC 470-20 "Debt with Conversion and Other Options". Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The liability component at issuance is recognized at fair value, based on the fair value of a similar instrument of similar credit rating and maturity that does not have a conversion feature. The equity component is based on the excess of the principal amount of the convertible senior notes over the fair value of the liability component and is recorded in additional paid-in capital. The equity component, net of issuance costs and deferred tax effects is presented within additional paid-in-capital and is not remeasured as long as it continues to meet the conditions for equity classification. The difference between the principal amount and the liability component represents a debt discount that is amortized to financial expense over the respective terms of the Notes using an effective interest rate method. The Company allocated the total issuance costs incurred to the liability and equity components of the convertible senior notes based on their relative values.
Issuance costs attributable to the liability and equity components were $5,894 and $518, respectively. Issuance costs attributable to the liability are netted against the principal balance and will be amortized to financial expense using the effective interest method over the contractual term of the notes. The effective borrowing rate of the liability component of the notes (after deduction of the abovementioned issuance costs attributed to the liability component) is 2.365%. This borrowing rate was based on Company's synthetic credit risk rating.
For a discussion of other significant accounting policies used in the preparation of our financial statements and recent accounting pronouncements, see Note 2 to our consolidated financial statements contained elsewhere in this report.
New Accounting Pronouncements
For information regarding new accounting pronouncements, see Note 2W to our consolidated financial statements contained elsewhere in this annual report.
5.AOperating Results
Overview
A substantial portion of our revenues is coming from a small number of customers, and we anticipate that our revenues will continue to depend on a limited number of major customers.
For the distribution of our total revenues, from products and services, by geographic areas, see Note 12A to our consolidated financial statements.
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The sales cycle of our systems is long and the rate and timing of customer orders may vary significantly from month to month as a function of the specific timing of fab expansions. We schedule production of our systems based upon order backlog and customer forecasts.
Our revenues increased by 19.8% in 2020 following a decrease of 10.4% in 2019, and an increase of 13.1% in 2018.
The following table shows the relationship, expressed as a percentage, of the listed items from our consolidated income statements to our total revenues for the periods indicated:
|
Percentage of Total Revenues | ||||||||||||
|
Year ended December 31, | ||||||||||||
|
2018 |
2019 |
2020 | ||||||||||
|
| ||||||||||||
|
Revenues from product |
77.0 |
% |
74.3 |
% |
77.7 |
% | ||||||
|
Revenues from services |
23.0 |
% |
25.7 |
% |
22.3 |
% | ||||||
|
| ||||||||||||
|
Total revenues |
100.0 |
% |
100.0 |
% |
100.0 |
% | ||||||
|
| ||||||||||||
|
Cost of revenues products |
28.6 |
% |
29.9 |
% |
29.2 |
% | ||||||
|
Cost of revenues services |
13.6 |
% |
15.9 |
% |
14.1 |
% | ||||||
|
Total cost of revenues |
42.2 |
% |
45.8 |
% |
43.2 |
% | ||||||
|
| ||||||||||||
|
Gross profit |
57.8 |
% |
54.2 |
% |
56.8 |
% | ||||||
|
| ||||||||||||
|
Operating expenses: | ||||||||||||
|
Research and development, net |
18.1 |
% |
19.8 |
% |
19.7 |
% | ||||||
|
Sales and marketing |
11.1 |
% |
12.5 |
% |
10.9 |
% | ||||||
|
General and administrative |
3.5 |
% |
4.5 |
% |
4.6 |
% | ||||||
|
Amortization of intangible assets |
1.1 |
% |
1.2 |
% |
0.9 |
% | ||||||
|
| ||||||||||||
|
Total operating expenses |
33.8 |
% |
38.0 |
% |
36.1 |
% | ||||||
|
| ||||||||||||
|
Operating income |
24.1 |
% |
16.2 |
% |
20.6 |
% | ||||||
|
| ||||||||||||
|
Financial income, net |
1.2 |
% |
1.4 |
% |
0.3 |
% | ||||||
|
Income before income taxes |
25.3 |
% |
17.6 |
% |
21.0 |
% | ||||||
|
| ||||||||||||
|
Income tax expenses |
3.6 |
% |
1.9 |
% |
3.2 |
% | ||||||
|
| ||||||||||||
|
Net income |
21.7 |
% |
15.6 |
% |
17.8 |
% | ||||||
Comparison of Years Ended December 31, 2020 and 2019
Revenues. Our revenues in 2020 increased by $44.5 million, or 19.8%, compared to 2019. Revenues attributable to product sales were $209.3 million, an increase of $42.1 million, or 25.2%, compared to 2019. Revenues attributable to services were $60.1 million, an increase of $2.4 million, or 4.1%, compared to 2019. The increase in product revenues in 2020 was attributed to higher demand for our products across all main product lines, including revenues from new product line introduced in 2020. The increase in services revenues in 2020 was attributed mainly to the increase in our systems installed base in recent years.
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Cost of Revenues and Gross Profit. Cost of revenues consists of labor, material and overhead costs of manufacturing our systems, royalties, and the costs associated with our worldwide service and support infrastructure. It also consists of inventory write-offs and provisions for estimated future warranty costs for systems we have sold. Our cost of revenues attributable to product sales in 2020 was $78.6 million. Our gross margin attributable to product revenues in 2020 was 62.5%, compared to 59.7% in 2019. The increase in products gross margins in 2020 is related mainly to the increase in sales and to a different product mix.
Our cost of services in 2020 was $37.9 million, compared to $35.8 million in 2019. Gross margin attributable to service revenues in 2020 was 36.9%, compared to 38.0% in 2019. The decrease in services gross margins in 2020 is related mainly to different service revenue mix which included higher portion of time and materials resulting in higher materials costs and higher personnel costs that were partially offset by decrease in travel expenses due to the COVID-19 travel restrictions.
Research and Development Expenses, net. Consist primarily of salaries and related expenses and also include consulting fees, subcontracting costs, related materials and overhead expenses, after offsetting grants received or receivable from the IIA and the European Community, as well as other funding for research and development activities. Our net research and development expenses in 2020 were $53.0 million, an increase of $8.5 million, or 19.1%, compared to 2019, after offsetting grants received of $5.6 million in 2020 and $6.9 million in 2019. Research and development expenses excluding grants received or receivable in 2020 were $58.6 million, compared to $51.4 million in 2019, and increased due to higher investment in new products and technologies and higher personnel costs. In 2020, net research and development expenses represented 19.7% of our revenues, compared to 19.8% of our revenues in 2019.
Sales and Marketing Expenses. Sales and marketing expenses are mainly comprised of salaries and related costs for sales and marketing personnel, travel related expenses, overhead and commissions to our representatives and sales personnel. Our sales and marketing expenses in 2020 were $29.3 million, an increase of $1.1 million, or 3.9%, compared to 2019. The increase in sales and marketing expenses in 2020 was mainly attributed to the higher personnel costs offset by decrease in travel expenses due to the COVID-19 travel restrictions. Sales and marketing expenses represented 10.9 % our revenues in 2020 compared to 12.5% of our revenues in 2019.
Amortization of Intangible Assets. As part of the acquisition of ReVera on April 2, 2015, the Company acquired $12.3 million of intangible asset related to technology. In 2020 and 2019, the Company recorded $2.5 million and $2.6 million of amortization of intangible assets respectively.
General and Administrative Expenses. General and administrative expenses are comprised of salaries and related expenses and other non-personnel related expenses such as legal expenses. Our general and administrative expenses in 2020 were $12.5 million, an increase of $2.4 million, or 24.3%, compared to 2019. The increase in general and administration expenses was attributed mainly to higher personnel costs and related overhead, including costs related to our new headquarters facility in Israel. In 2020, general and administration expenses represented 4.6% of our revenues, compared to 4.5% of our revenues in 2020.
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Income Tax Expenses. Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. In 2020, we recorded $8.6 million of income tax expenses, reflecting effective tax rate of 15.2 %. In 2019, we recorded $4.3 million of income tax expenses, reflecting effective tax rate of 10.9%. The increase in the effective tax rate in 2020 is attributed mainly to US territory tax benefits which were recorded in 2019.
Comparison of Years Ended December 31, 2019 and 2018
Revenues. Our revenues in 2019 decreased by $26.2 million, or 10.4%, compared to 2018. Revenues attributable to product sales were $167.2 million, a decrease of $26.1 million, or 13.5%, compared to 2018. Revenues attributable to services were $57.7 million, a decrease of $0.1 million, or 0.2%, compared to 2018. The decrease in product revenues in 2019 was attributed to both OCD and XPS products, due to the decrease in WFE investments in 2019.
Cost of Revenues and Gross Profit. Cost of revenues consists of labor, material and overhead costs of manufacturing our systems, royalties, and the costs associated with our worldwide service and support infrastructure. It also consists of inventory write-offs and provisions for estimated future warranty costs for systems we have sold. Our cost of revenues attributable to product sales in 2019 was $67.3 million. Our gross margin attributable to product revenues in 2019 was 59.7%, compared to 62.9% in 2018. The decrease in products gross margins in 2019 is related mainly to the decrease in sales and to a different product mix including transition to new product generations which are bearing higher costs.
Our cost of services in 2019 was $35.8 million, relative to $34.2 million in 2018. Gross margin attributable to service revenues in 2019 was 38.0%, compared to 40.9% in 2018. The decrease in services gross margins in 2019 is related mainly to the higher personnel costs in that year.
Research and Development Expenses, net. Consist primarily of salaries and related expenses and also include consulting fees, subcontracting costs, related materials and overhead expenses, after offsetting grants received or receivable from the IIA and the European Community, as well as other funding for research and development activities. Our net research and development expenses in 2019 were $44.5 million, a decrease of $0.9 million, or 2.1%, compared to 2018, after offsetting grants received of $6.9 million in 2019 and $5.8 million in 2018. Research and development expenses excluding grants received or receivable in 2019 were $51.4 million, compared to $51.2 million in 2018. In 2019, net research and development expenses represented 19.8% of our revenues, compared to 18.1% of our revenues in 2018.
Sales and Marketing Expenses. Sales and marketing expenses are mainly comprised of salaries and related costs for sales and marketing personnel, travel related expenses, overhead and commissions to our representatives and sales personnel. Our sales and marketing expenses in 2019 were $28.2 million, an increase of $0.2 million, or 0.8%, compared to 2018. The increase in sales and marketing expenses in 2019 was mainly attributed to increase in marketing costs related to systems evaluation processes by customers. Sales and marketing expenses represented 12.5 % our revenues in 2019 compared to 11.1% of our revenues in 2018.
Amortization of Intangible Assets. As part of the acquisition of ReVera on April 2, 2015, the company acquired $12.3 million of intangible asset related to technology. In both 2019 and 2018, the company recorded $2.6 million of amortization of intangible assets.
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General and Administrative Expenses. General and administrative expenses are comprised of salaries and related expenses and other non-personnel related expenses such as legal expenses. Our general and administrative expenses in 2019 were $10.1 million, an increase of $1.3 million, or 15.2%, compared to 2018. The increase in general and administration expenses was attributed mainly to new facilities related costs. In 2019, general and administration expenses represented 4.5% of our revenues, compared to 3.5% of our revenues in 2018.
Income Tax Expenses. Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. In 2019, we recorded $4.3 million of income tax expenses, reflecting effective tax rate of 10.9 %. In 2018, we recorded $9.1 million of income tax expenses, reflecting effective tax rate of 14.3%. The decrease in the effective tax rate in 2019 is attributed mainly to US territory tax benefits, including benefits related to US Tax Cuts and Jobs Act.
5.BLiquidity and Capital Resources
As of December 31, 2020, we had working capital of approximately $497.8 million compared to working capital of approximately $256.7 million as of December 31, 2019. The increase in our working capital is related mainly to our fluent profits and the Convertible Senior Notes offering which we completed in October 2020.
Cash and cash equivalents, short-term and long-term deposits as of December 31, 2020 were $427.9 million compared to $191.1 million as of December 31, 2019, and increased mainly as a result our fluent operating cash flow and the Convertible Senior Notes offering which we completed in October 2020.
Trade accounts receivables increased from $51.6 million as of December 31, 2019 to $63.3 million as of December 31, 2020.
Inventories increased from $48.4 million as of December 31, 2019 to $61.7 million as of December 31, 2020. The increase in inventory is related to the introduction of new products and to the increase in our global inventories related to services, and to our decision to manufacture in full capacity during the COVID-19 environment.
Operating activities in 2020 generated positive cash flow from operating activities of $60.3 million compared to a positive cash flow from operating activities of $40.7 million in 2019. The increase in operating cash flow in 2020 is mainly related to higher profitability and to effective collection of accounts receivables in 2020 relative to 2019.
The following table describes our investments in capital expenditures during the last three years:
|
2018 |
2019 |
2020 | ||||||||||||||||||||||
|
Domestic |
Abroad |
Domestic |
Abroad |
Domestic |
Abroad | |||||||||||||||||||
|
(US dollars, in thousands) | ||||||||||||||||||||||||
|
Electronic equipment |
2,400 |
237 |
3,975 |
418 |
2,742 |
431 | ||||||||||||||||||
|
Office furniture and equipment |
21 |
19 |
2,192 |
604 |
28 |
510 | ||||||||||||||||||
|
Leasehold improvements |
493 |
508 |
11,231 |
2,849 |
1,865 |
867 | ||||||||||||||||||
|
Total |
2,914 |
764 |
17,398 |
3,871 |
4,635 |
1,808 | ||||||||||||||||||
In 2020, the investment in capital expenditures was financed from our fluent operating cash flow, and included major investments in leasehold improvements in our new facilities in Israel and the US. In 2021, we expect our capital spending, to be approximately $10 million.
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Our principal liquidity requirement is expected to be for working capital and capital expenditures, as well as additional acquisitions. We believe that our current cash reserves will be adequate to fund our planned activities for at least the next twelve months. Our long-term capital requirements will be affected by many factors, including the success of our current products, our ability to enhance our current products and our ability to develop and introduce new products that will be accepted by the semiconductor industry. We plan to finance our long-term capital needs with our cash reserves together with positive cash flow from operations, if any. If these funds are insufficient to finance our future business activities, which may include acquisitions, we would have to raise additional funds through the issuance of additional equity or debt securities, through borrowing or through other means. We cannot assure that additional financing will be available on acceptable terms.
Presently, our long-term debt is comprised from Convertible Senior Notes. We do not have a readily available source of long-term debt financing such as a line of credit.
With regard to usage of hedging financial instruments and the impact of inflation and currency fluctuations, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk” in this annual report on Form 20-F.
5.CResearch and Development, Patents and Licenses, etc.
For information regarding our research and development activities, see “Item 4B – Research and Development” in this annual report on Form 20-F.
Grants from the Israeli Innovation Authority & European Programs
IIA sponsoring for generic research and development projects of large Israeli companies
We participate in a generic research and development programs sponsored by the IIA, available for Israeli companies that meet specific criteria’s set forth by the IIA. Companies eligible to participate in these programs receive IIA funding intended to focus on long-term creation of know-how and technological infrastructure, used for the development or production of future innovative products. These programs do not require payments of royalties to the IIA, but all other restrictions under the Innovation Law, such as local manufacturing obligations and know-how transfer limitations, as further detailed hereunder, are applicable to the know how developed by us with the funding received in such programs.
IIA sponsoring for Israeli research and development consortiums
In 2020 and 2019, and in previous years, we participated in a consortium program sponsored by IIA. Under the terms of this program, we cooperate with additional companies, Universities and research institutes in Israel, organized in a consortium for the development of new technologies. The rules of the consortium include several references to the distribution of knowledge between the consortium members, requires us to provide the other members in the consortium with a non-sub-licensable license to use the “new information” developed by such member, without consideration. These programs do not require payments of royalties to the IIA, but all other restrictions under the Innovation Law, such as local manufacturing obligations and know-how transfer limitations, as further detailed hereunder, are applicable to the know how developed by us with the funding received in such programs.
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Joint programs of the European Research Area and the IIA
We participate in European consortiums, which are joint programs governed by the Electronic Component Systems for European Leadership Joint Undertaking (the “JU”) as part of the Horizon 2020 cooperation between the European Research Area and the IIA (the “EU Consortiums”).
Some of the obligations and undertakings specified hereunder in connection with our IIA activities (such as the restrictions under the Innovation Law and obligation to grant certain access rights to our technology and intellectual property rights) apply with respect to these joint projects. In addition, the participation in an EU Consortium includes specific obligations, such as the following: The budgeted grant will be paid to the company pursuant to certain rules regarding ‘eligible costs’; Obligation to properly implement the activities assigned under the specific EU Consortium project; Restrictions in contributions of third parties (by service or otherwise); Obligation to keep information up to date and to inform about events and circumstances likely to affect the consortium activity; Obligations related to records keeping, investigations and audits by the JU in order to verify the proper implementation of the specific EU Consortium project and compliance with the obligations under the terms of the program, including assessing deliverables and reports during a period of up to two years following the receipt by the company of the full grant payment; Obligations related to Intellectual property allocation generated by an EU Consortium, background intellectual property designation prior to the commencement of the EU Consortium’s project and the provision of access rights to results obtained as part of the EU Consortium. Breach of such obligations may result in the reduction of the aggregate expected grant amount or claiming back previously received grants. In addition, the company may be subject to administrative and financial penalties such as temporary exclusion from all JU European Consortiums and fines of up to 10% of the maximum expected grant, as well as to contractual liabilities.
Past royalty bearing programs and royalties arrangements
Some of our previous research and development efforts were financed in part through royalty-bearing grants. We were obligated to pay royalties of 5% in 2016 and 2015 and in previous years, of revenues derived from sales of products funded with these grants. This obligation included different annual interest rates ranging up to 5%. In August 2016, we entered into a royalty buyout arrangement, or the Arrangement, with the IIA. As part of the Arrangement we paid approximately $12.9 million to the IIA in September 2016. The contingent net royalty liability to the IIA at the time we executed the Arrangement was approximately $24 million. As a result of the foregoing payment, we are released from any future royalty payments on these previous funds received from the IIA. However, to the extent that we will be able to commercialize products that were developed as part of IIA programs and were declared as “failed” at the time of the Arrangement, we will be required to pay royalties to the IIA from income generated from such commercialization. Currently, we do not anticipate that such failed projects will generate revenues in the future. We note that the Arrangement does not release the Company from other obligations towards the IIA as further detailed herein. In addition, in the future, we may, alone or together with third parties, participate in research and development programs, which may bear royalty obligations (depending on the specific terms of the applicable program).
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Pertinent obligations under the Israeli Encouragement of Research, Development and Technological Innovation in the Industry Law 1984
Under the Encouragement of Research, Development and Technological Innovation in the Industry Law 1984 and the provisions of the applicable regulations, rules, procedures and benefit tracks, together the Innovation Law, a qualifying research and development program is typically eligible for grants of up to 50% of the program’s pre-approved research and development expenses. The program must be approved by a committee of the IIA. The recipient of the grants is required to return the grants by the payment of royalties on the revenues generated from the sale of products (and related services) developed (in whole or in part) under IIA program up to the total amount of the grants received from IIA, linked to the U.S. dollar and bearing annual interest (as determined in the Innovation Law). Following the full payment of such royalties and interest, there is generally no further liability for royalty payment for our currently developed and sold products. Nonetheless, the restrictions under the Innovation Law (as generally specified below) will continue to apply even after our company has repaid the grants, including accrued interest, in full.
The main pertinent obligations under the Innovation Law are as follows:
•
Local Manufacturing Obligation. The terms of the grants under the Innovation Law require that we manufacture the products developed with these grants in Israel. Under the regulations promulgated under the Innovation Law, the products may be manufactured outside Israel by us or by another entity only if prior approval is received from the IIA (such approval is not required for the transfer of less than 10% of the manufacturing capacity in the aggregate, as declared to be manufactured out of Israel in the applications for funding, in which case a notice should be provided to the IIA). This approval may be given only if we abide by all the provisions of the Innovation Law and related regulations. Ordinarily, as a condition to obtaining approval to manufacture outside Israel, we would be required to pay royalties at an increased rate (usually 1% in addition to the standard rate and increased royalties cap between 120% and 300% of the grants, depending on the manufacturing volume that is performed outside Israel). We note that a company also has the option of declaring in its IIA grant application an intention to exercise a portion of the manufacturing capacity abroad, thus, if the grant application is approved by IIA, such company will avoid the need to obtain additional approvals and pay the increased royalties cap for manufacturing outside of Israel at portions which were mentioned in such approved grant applications.
•
Know-How transfer limitation. The Innovation Law restricts the ability to transfer know-how funded by the IIA outside of Israel, including by way of a license to a non-Israeli entity. Transfer of IIA funded know-how outside of Israel requires prior approval of the IIA. The IIA approval to transfer know-how created, in whole or in part, in connection with an IIA-funded project to third party outside Israel is subject to payment of a redemption fee to the IIA calculated according to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants to the company’s aggregate investments in the project that was funded by these IIA grants, multiplied by the transaction consideration, taking into account depreciation mechanism, and less royalties already paid to the IIA. The regulations promulgated under the Innovation Law establish a maximum payment of the redemption fee paid to the IIA under the above mentioned formulas and differentiates between two situations: (i) in the event that the company sells its IIA funded know-how, in whole or in part, or is sold as part of an M&A transaction, and subsequently ceases to conduct business in Israel, the maximum redemption fee under the above mentioned formulas will be no more than six times the total grants received (plus accrued interest) for development of the know-how being transferred, or the entire amount received from the IIA, as applicable; (ii) in the event that following the transactions described above (i.e., asset sale of IIA funded know-how or transfer as part of an M&A transaction) the company undertakes to continue its R&D activity in Israel (for at least three years following such transfer and maintain at least 75% of its R&D staff employees it had for the six months before the know-how was transferred, while keeping the same scope of employment for such R&D staff), then the company is eligible for a reduced cap of the redemption fee of no more than three times the amounts received (plus accrued interest) for the applicable know-how being transferred, or the entire amount received from the IIA, as applicable. No assurance can be given that approval to any such transfer, if requested, will be granted and what will be the amount of the redemption fee payable.
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Approval of the transfer of IIA funded technology to another Israeli company requires a pre-approval by IIA and may be granted only if the recipient undertakes to fulfil all the liabilities to IIA and undertakes abides by all the provisions of the Innovation law and related regulations, including the restrictions on the transfer of know-how and manufacturing rights outside of Israel and the obligation to pay royalties. In light of the Arrangement (as further discussed below), in certain circumstances, under such sale transactions (i.e., the transfer of IIA funded technology or portion thereof to another Israeli company), we might be obligated to pay royalties to the IIA from any income derived from such a sale transaction.
•
Licensing arrangements. Under the terms of the Innovation Law, licensing know how developed under the IIA programs outside of Israel, requires prior consent of IIA and payment of license fees to IIA, calculated in accordance with the licensing rules promulgated under the Innovation Law. The payment of the license fees does not discharge the company from the obligation to pay royalties or other payments due to IIA in accordance with Innovation Law.
These restrictions may impair our ability to enter into agreements for those products or technologies which were developed with assistance of the IIA grants without the approval of the IIA. We cannot be certain that any approval of the IIA will be obtained on terms that are acceptable to us, or at all. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of know-how developed with IIA funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial obligations. 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 may expose us to criminal proceedings. In addition, IIA may from time-to-time audit sales of products which it claims incorporate technology funded via IIA programs and this may lead to additional royalties being payable on additional products.
5.DTrend Information
For Information regarding most significant recent trends in our market, see “Item 4B– Our Market – The World Economy – Update” in this annual report on Form 20-F.
5.EOff-Balance Sheet Arrangements
We do not have and are not party to any off-balance sheet arrangements.
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5.FTabular Disclosure of Contractual Obligations
As of December 31, 2020, we had contractual obligations as described in the following table:
|
Payment due by Period (US Dollars, in $ thousands) | ||||||||||||||||||||
|
Total |
Less than 1 year |
2-3 years |
4-5 years |
More than 5 years | ||||||||||||||||
|
Purchase Obligations |
41,027 |
38,660 |
2,362 |
5 |
- | |||||||||||||||
Item 6. Directors, Senior Management and Employees
6.A Directors and Senior Management
The following is the list of senior management and directors as of February 16, 2021:
|
Name |
Age |
Position |
|
Michael Brunstein (3) |
77 |
Chairman of the Board of Directors |
|
Avi Cohen (1) |
67 |
Director |
|
Raanan Cohen (2) |
65 |
Director |
|
Zehava Simon (1)(2)(3) |
62 |
Director (External Director until May 2018) |
|
Dafna Gruber (1)(2) |
55 |
Director (External Director until May 2018) |
|
Ronnie (Miron) Kenneth (2)(3) |
64 |
Director |
|
Eitan Oppenhaim |
55 |
Director, President and Chief Executive Officer |
|
Dror David |
51 |
Chief Financial Officer |
|
Shay Wolfling |
49 |
Chief Technology Officer |
|
Gabriel Waisman |
50 |
Chief Business Officer |
|
Adrian S. Wilson |
49 |
President of US subsidiary & General Manager Material Metrology Division |
|
Gabi Sharon |
59 |
Chief Operations Officer |
|
Sharon Dayan |
48 |
Chief Human Resources Officer |
|
Zohar Gil |
54 |
Chief Marketing and Business Development Officer |
|
Effi Aboody |
50 |
Corporate VP and General Manager Dimensional Metrology Division |
|
|
|
|
|
(1)Member of the audit committee |
|
| ||
|
(2)Member of the compensation committee | ||
|
| ||
|
(3)Member of the Nominating committee |
Dr. Michael Brunstein was named chairman of our board of directors in June 2006, after serving as member of our board of directors from November 2003. During the years 1990 and 1999, Dr. Brunstein served as Managing Director of Applied Materials Israel Ltd. Prior to that, Dr. Brunstein served as President of Opal Inc., and as a Director of New Business Development in Optrotech Ltd. Dr. Brunstein holds a B.Sc. in Mathematics and Physics from The Hebrew University, Jerusalem, and a M.Sc. and a Ph.D. in Physics from Tel Aviv University, Israel.
Mr. Avi Cohen has served as a director of the Company since 2008. He also, serves on the board of directors of Cortica Ltd., CGS Tower Networks Ltd. and BioFishency Ltd. From July 2016 to September 2017 Mr. Cohen served as the chief executive officer of MX1, a global media service provider founded in July 2016 as a result of the acquisition of RR Media (Nasdaq: RRM) by SES S.A. and the following merger between RR Media, and SES Platform Services GmbH. From July 2012 till the merger, Mr. Cohen served as the chief executive officer of RR Media. Prior to that, until March 2012, Mr. Cohen served as president and chief executive officer of Orbit Technologies, a public company traded on the TASE. From September 2006 to December 2008, Mr. Cohen served as chief operating officer and deputy to the chief executive officer of ECI Telecom Ltd. a leading supplier of networking infrastructure equipment. Prior to joining ECI, Mr. Cohen served in a variety of executive management positions at KLA (Nasdaq: KLAC). From 2003 he was a group vice president, corporate officer and member of the executive management committee. During his tenure, he successfully led the creation of KLA’s global Metrology Group. From 1995 he was the president of KLA Israel responsible for the optical metrology division. Prior to joining KLA, Mr. Cohen also spent three years as managing director of Octel Communications, Israel, after serving as chief executive officer of Allegro Intelligent Systems, which he founded and which was acquired by Octel. Mr. Cohen holds B.Sc. and M.Sc. degrees in electrical engineering and applied physics from Case Western Reserve University, USA.
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Mr. Raanan Cohen was appointed as a director of the Company by our board of directors in February 2014. Prior to that and until December 2012, Mr. Cohen has served as the President and Chief Executive Officer of Orbotech Ltd., a public company traded on Nasdaq. Mr. Cohen has also served in a range of other executive positions at Orbotech Ltd, including Co-President for Business and Strategy, EVP and President of the Printed Circuit Board (PCB) Division, Vice President for the PCB-AOI product line and President and chief executive officer of Orbotech, Inc. Prior to its merger with Orbotech in 1991, Mr. Cohen held various positions at Orbot, another manufacturer of AOI systems. Prior to joining Orbot in 1984, he worked at Telrad Networks Ltd. Mr. Cohen currently serves as the Chief Executive Officer of EyeWay Vision Ltd., a private company. Mr. Cohen holds a B.Sc. in Computer Science from the Hebrew University in Jerusalem, Israel.
Ms. Zehava Simon was elected as the Company’s external director in accordance with the provisions of the Companies Law in June 2014 and reelected in June 2017. Effective as of May 2018, and our adoption of the exemption under the Regulation (as defined below), Ms. Simon is no longer classified as an external director under the Companies Law. Ms. Simon served as a Vice President of BMC Software from 2000 until 2013 and in her last position (as of 2011) acted as Vice President of Corporate Development. From 2002 to 2011, Ms. Simon served as Vice President and General Manager of BMC Software in Israel. In this role, she was responsible for directing operations in Israel and India as well as offshore sites. Prior to that, Ms. Simon held various positions at Intel Israel., which she joined in 1982, including leading of Finance & Operations and Business Development for Intel in Israel. Ms. Simon is currently a board member of Audiocodes Ltd., a public company traded on Nasdaq and TASE, Nice Systems, a public company traded on Nasdaq and TASE. Ms. Simon is a former member of the board of directors of Insightec Ltd. (2005-2012), M-Systems Ltd., a Nasdaq listed company which was acquired in 2006 by SanDisk Corp., a public company traded on Nasdaq as well (2005-2006) and Tower Semiconductor Ltd., a public company traded on TASE and Nasdaq (1999-2004). Ms. Simon holds a B.A. in Social Sciences from the Hebrew University, Jerusalem, Israel, a law degree (LL.B.) from the Interdisciplinary Center in Herzliya and an M.A. in Business and Management from Boston University, USA.
Ms. Dafna Gruber was elected as the Company’s external director in accordance with the provisions of the Companies Law in April 2015 and reelected in April 2018. Effective as of May 2018, and our adoption of the exemption under the Regulation, Ms. Gruber is no longer classified as an external director under the Companies Law. Ms. Gruber has broad experience, serving as chief financial officer and a senior executive management member in leading hi-tech companies traded on both Nasdaq and TASE. From February 2019 until February 2021, Ms. Gruber served as chief financial officer of Aqua security Ltd., a private company. From September 2017 until February 2019, Ms. Gruber served as the chief financial officer of Landa Corporation Ltd., and then as financial advisor to Landa group. From 2015 until 2017, Ms. Gruber served as the chief financial officer of Clal Industries Ltd., a private company. From 2007 until 2015, Ms. Gruber served as the chief financial officer of Nice Systems Ltd., a public company traded on Nasdaq and TASE. As a member of the senior management team, Ms. Gruber was a senior member of the strategy and M&A forum of the company. During her employment with Nice, Ms. Gruber was responsible, inter alia, for finance, operation, MIS and IT, legal and investor relations. From 1996 until 2007, Ms. Gruber was part of Alvarion Ltd., a public company traded on Nasdaq and TASE, mostly as chief financial officer. Prior to that, from 1993 to 1996, Ms. Gruber was a controller at Lannet Data Communications Ltd., subsequently acquired by Lucent Technologies Inc. Ms. Gruber serves as an external director at TAT Technologies Ltd., a public company traded on Nasdaq and TASE, since November 2013, as an external director at Tufin software technologies Ltd., a public company traded on NYSE since April 2019 and as an independent director at Cognyte Ltd, a public company traded on Nasdaq. Ms. Gruber is a certified public accountant and holds a Bachelor’s degree in Accounting and Economics from Tel Aviv University, Israel.
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Mr. Ronnie (Miron) Kenneth was appointed to serve as a director of the Company by our board of directors in December 2017 and was reappointed by our shareholders in April 2018. Mr. Kenneth is a veteran high-tech leader who served for ten years as Chairman and Chief Executive Officer at Voltaire Technologies Ltd. (Nasdaq: VOLT), leading it to an initial public offering on Nasdaq in 2007. Following Voltaire’s merger with Mellanox Technologies Ltd. (Nasdaq: MLNX) in 2011, Mr. Kenneth became the Chief Executive Officer of Pontis Ltd., a privately-held company, until 2013. Mr. Kenneth currently serves as the Chairman of Teridion Technologies Ltd., and Varada Ltd., and he is a director of Allot Communications Ltd. (Nasdaq: ALLT). Mr. Kenneth holds a BA in Economics and Computer Science from the Bar-Ilan University and an MBA from the Golden Gate University, San Francisco.
Mr. Eitan Oppenhaim has been serving as the President and Chief Executive Officer of the Company since July 31, 2013, and was appointed by our board of directors to also serve as a director of the Company in October 2019. He has previously served as the Executive Vice President Global Business Group, since November 2010. From 2009 until 2010, Mr. Oppenhaim served as Vice President and Europe General Manager of Alvarion Ltd., a public company traded on Nasdaq. During the years 2007 through 2009, Mr. Oppenhaim served as Vice President of sales and marketing of OptimalTest Ltd.. Prior to that, from 2002 till 2006, Mr. Oppenhaim served as Vice President – Business Manager of the Flat Panel Displays division of Orbotech Ltd., a public company traded on Nasdaq. From 2001 till 2002, Mr. Oppenhaim served as Managing Director of Asia Pacific at TTI Telecom International, a leading provider of assurance, analytics and optimization solutions to communications service providers (CSP) worldwide. Prior to that, from 1994 till 2001, Mr. Oppenhaim held several key executive positions at Comverse Network Systems Ltd., a public company traded on Nasdaq. Mr. Oppenhaim holds a BA in Economics from the Haifa University, Israel and an MBA from Ben-Gurion University, Beer-Sheva, Israel.
Mr. Dror David has served as the Chief Financial Officer since November 2005. Mr. David joined Nova in April 1998, as the Company’s Controller, and since then served in various financial and operational positions, including the position of Vice President of Resources, in which he was responsible for the finance, operations, information systems and human resources functions of the Company. Mr. David was also a leading member in the Company’s initial public offering on Nasdaq in 2000, the Company’s private placement in 2007 and the Company's secondary offering in 2010. Prior to joining Nova, Mr. David spent five years in public accounting with Deloitte Touch in Tel Aviv, specializing in industrial high-tech companies. Mr. David is a Certified Public Accountant in Israel, holds a B.A. in Accounting and Economics from Bar Ilan University, and an M.B.A. from Derby University of Britain.
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Dr. Shay Wolfling joined Nova in 2011, as Chief Technology Officer. Prior to joining Nova, Dr. Wolfling was an R&D manager at KLA-Tencor-Belgium (formerly ICOS Vision Systems, a public traded company acquired by KLA in 2008), where he led multidisciplinary metrology & inspection development projects. From 2000 until its technology acquisition by ICOS in 2005, Dr. Wolfling was a founder and Vice President of Research and Development of Nano-Or-Technologies, a start-up company with a proprietary technology for 3D optical measurements. Dr. Wolfling took Nano-Or from the idea stage to initial product sales. Prior to founding Nano-Or, Dr. Wolfling was a project manager in Y-Beam-Technologies, a start-up offering laser-based skin treatments. Dr. Wolfling has several patents under his name in the field of optical measurements. Dr. Wolfling holds a B.Sc. in physics and mathematics from the Hebrew University of Jerusalem, Israel, a second degree in physics from Tel-Aviv University, Israel and a Ph.D. in physics from the Hebrew University of Jerusalem, Israel.
Mr. Gabriel Waisman joined Nova in 2016 as our Chief Business Officer, responsible for the Company’s customer facing groups, including global sales, marketing, customer support and applications. Mr. Waisman brings over 21 years of managerial expertise in a global geographically dispersed environment, and extensive experience in working with pioneering multidisciplinary technologies, particularly within the electronics and telecom sectors. Prior to joining Nova, Mr. Waisman served as President at Orbotech Pacific (Orbotech LTD, Hong Kong) from August 2013 until April 2016 and Orbotech West (Orbotech Inc., USA) from May 2011 until July 2013, where he was responsible for sales and marketing, finance and operations, and customer support. Previous to this, from June 2003 until May 2011, Mr. Waisman served in various managerial positions at Alvarion Technologies Ltd., starting as Strategic Marketing Director, EMEA, and moving on to Vice President of Strategic Accounts, General Manager of West Europe, followed by Managing Director, Asia-Pacific. Mr. Waisman has also served as EMEA Regional Sales and Marketing Director (Broadband division) at Comverse Ltd. Mr. Waisman holds a B.Sc. in Electronic Engineering from the Technion – Israel Institute of Technology, Haifa, Israel and an MBA in Business Administration from the Tel-Aviv University, Israel.
Mr. Adrian S. Wilson Joined Nova in January 2018 as General Manager Material Metrology Division and President of our US subsidiary, Nova Measuring Instruments, Inc. Mr. Wilson has over 25 years of Semiconductor capital equipment and materials experience. Mr. Wilson joins us from Nanometrics Inc, where he held the position of Vice President & General Manager of Advanced Imaging and Analytics Business Unit. Prior to Nanometrics Inc, he held the position of Managing Director of Element Six Technologies Ltd., the non-abrasive arm of the synthetic diamond group of DeBeers, focused on thermal management and optical components for the semiconductor industry. Mr. Wilson has experience in leading both start-ups and divisions within large public multi-national companies, including KLA, FormFactor Inc. and Phoenix X-ray Systems & Services Inc., a capital equipment start-up. Mr. Wilson holds a bachelor’s degree in Electronics Engineering, post Grad in Marketing Management and a MBA in Technology Management. Mr. Wilson’s accreditations include Fellow of the Chartered Institute of Marketing (UK) and Fellow of the Institute of Directors (UK).
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Mr. Gabi Sharon was appointed as Chief Operating Officer in September 2020 and has over 25 years of managerial experience in Semiconductor industry. Mr. Sharon joined Nova in 1995 and served in several executive positions. Previously, since 2006 Mr. Sharon served as the Nova’s Corporate Vice President of Operations. In his first role at Nova Mr. Sharon established the Global Customer Support Organization and later he led the development department of the Integrated Metrology Product Line, its successful market launch and initial penetration of the Copper CMP market. Prior to joining Nova, Mr. Sharon served as the Marketing Project Manager in ECI Telecom, where he was responsible for implementing telecommunication networks projects in several countries across Asia. Mr. Sharon holds a B.Sc. in Computer Engineering from Northeastern University in Boston and M.Sc. in Technology Management from Polytechnic University in New York.
Ms. Sharon Dayan has served as our Chief Human Resources Officer since August 2019. Ms. Dayan joined Nova in January 2018, and until August 2019 served as Corporate Vice President Human Resources. Ms. Dayan is an experienced HR executive, bringing diversified experience which covers all human resources disciplines, including HR strategy, organizational and people development, M&A and employee experience. Prior to joining Nova Ms. Dayan served in several senior HR regional and corporate positions within global companies. Her last position before joining Nova, was in the role of SVP at Teva in the capacity of HR Business Partner for the global corporate functions. Prior to that she served as the Global Head of HR as part of Comverse management, responsible for all HR functions in the company. Before joining Comverse, Ms. Dayan had multiple positions in Amdocs. Ms. Dayan holds BA in Social Science from Tel-Aviv – Jaffe college, MSc. In Organizational Development from Tel-Aviv University and Group dynamics diploma from Tel Aviv university.
Mr. Zohar Gil has served as our Chief Marketing and Business Development Officer since September 2020. Mr. Gil joined Nova in June 2011, and until September 2020 served in various key business and marketing positions including Corporate Vice President for Marketing and Business Development, Head of Business Management for Nova’s foundry accounts in the Asia Pacific region and Head of Marketing and Product Management. Currently, as our Chief Marketing and Business Development Officer, Mr. Gil is focusing on the Company’s corporate marketing, strategy and M&A activities. Prior to joining Nova, from 2001 until 2010, Mr. Gil held leading business and marketing positions at Alvarion Ltd., including General Manager for the Carrier Line of Business and Vice President of Product Management. Prior to that, from 1997 until 2001, Mr. Gil served in variety of marketing and product management positions in 3Com Corporation. Mr. Gil holds a B.Sc. in Industrial Engineering from Tel-Aviv University, and an Executive MBA from Northwestern and Tel-Aviv Universities from the Kellogg-Recanati Business School of Management.
Mr. Effi Aboody has served as our Corporate VP and General Manager Dimensional Metrology Division since September 2019. Mr. Aboody joined Nova in 2016 as Vice President and Head of the Global Applications team, and has over 20 years’ experience in the Semiconductor Industry. He started his career at Intel as an Integration engineer, working in Portland and California R&D centers, in both logic and memory devices. Following that he held several managerial positions at Numonyx in Yield and Integration Departments. After that, he managed the Engineering and Yield Departments at Micron F12. He later returned to Intel to manage the F28 Yield Organization, responsible for CPU and SoC outgoing yield and performance. Effi holds an Executive MBA from Tel Aviv University and a B.Sc. in Materials Engineering from Ben-Gurion University.
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Voting Agreement
We are not aware of any voting agreement currently in effect.
6.B Compensation
The aggregate compensation expensed, including share-based compensation and other compensation expensed by us, to our executive officers with respect to the year ended December 31, 2020 (consisting of 9 persons) was $9.15 million. This amount includes approximately $0.7 million set aside or accrued to provide pension, severance, retirement, or similar benefits and amounts expensed by the Company for automobiles made available to its executive officers).
Disclosure regarding the compensation of our senior executives on an individual basis will be disclosed in our proxy statement in connection with the 2020 annual general meeting of shareholders in accordance with Israeli regulations.
Terms of employment of Mr. Eitan Oppenhaim, our President and Chief Executive Officer and a member of the board of directors, as approved by our shareholders, are as follows:
General
(i) a monthly base salary of NIS 156,000; (ii) an annual bonus of up to fourteen (14) monthly base salaries (with additional payment of up to 100% of the target bonus in the case of over achievement), subject to objectives which are annually predetermined by the board of directors and its committees, in accordance with our compensation policy; (iii) in connection with termination of employment (other than for cause), a three month advance notice and a six month adjustment period, during which Mr. Oppenhaim will be entitled to all of his compensation elements, and to the continuation of vesting of his options. In the event of employment termination during a fiscal year (unless for cause), the bonus shall be prorated (subject to certain adjustments); (iv) customary social benefits such as pension fund or management insurance, education fund, vacation pay, sick leave and convalescence pay; (v) subject to required approvals under applicable law, a directors and officers insurance, including a “run-off” insurance policy; (vi) non-disclosure, non-compete and ownership of intellectual property undertakings; and (vii) monthly travel expenses or a Company car, cellular phone, a land line phone, toll road expenses, a laptop computer and other expense reimbursements pursuant to the Company general policies.
Equity-Based Compensation
Since January 1, 2018 until December 31, 2020, per the approval of the respective annual general meeting of shareholders, Mr. Oppenhaim was granted a total of 140,000 options to purchase ordinary shares of the Company with a weighted average exercise price of $26.17 and 38,500 restricted share units. The options vest in equal annual installments over a terms of four years commencing one year following the grant date and the restricted share units vest in equal annual installments over a terms of three years commencing one year from the grant date; All options and restricted share units expire seven (7) years after each grant date; can be cancelled in accordance with the terms and conditions of the applicable incentive plan of the Company or the employment terms of Mr. Oppenhaim; and, were made in accordance with and subject to Section 102 of the Income Tax Ordinance of 1961 (New Version) (the “Ordinance”). In addition, Mr. Oppenhaim was granted in May 2018, July 2019 and July 2020, 98,500 performance based restricted units that vest over a period of three (3) years, provided that the Company meets or exceeds the performance targets for vesting set by the compensation committee and board of directors of the Company, unless such restricted share units have been cancelled in accordance with the terms and conditions of the share incentive plan of the Company or the employment terms of Mr. Oppenhaim. In the event a portion of these restricted share units fails to vest, such portion will be carried forward to the third vesting date and will vest if the Company’s average annual return on equity based on net income during the previous three (3) years shall be no less than ten percent (10%).
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Compensation upon Significant Event
Upon the occurrence of a Significant Event, unvested options granted to Mr. Oppenhaim will vest upon the consummation of the Significant Event, and unexercised options may be exercised until the earlier of two years from the consummation of the Significant Event, and termination of the options. Such arrangements will not apply if Mr. Oppenhaim remains the chief executive officer of our company or the surviving entity, and unvested options are replaced for new options of the surviving entity as part of the Significant Event with a vesting schedule and terms identical to the replaced options. Further, upon a Significant Event, Mr. Oppenhaim will be entitled to a special bonus of up to 12 monthly salaries, subject to the approval of the compensation committee and our board of directors and subject to the limitation on a special bonus imposed by our compensation policy. In the event of termination of employment (up to 12 months from the Significant Event), Mr. Oppenhaim will be entitled to the retirement terms under his employment agreement, the special bonus described above and the payment of the annual bonus in full for the year in which the Significant Event has occurred, subject to the annual bonus plan, on an annual basis calculation, and subject to the approval of the compensation committee and our board of directors prior to the consummation of the transaction, or the respective body in the new surviving entity following the transaction, as applicable. A “Significant Event” is defined for this purpose as: (1) the sale of all or substantially all of our company’s assets; (2) a merger of our company with or into another company or entity after which our shareholders will hold 50% or less of the surviving entity; (3) our company becoming a division or a subsidiary of another company; or (4) the purchase of our company's shares, after which the purchaser will hold 50% or more of our company's shares, provided, however, that the purchaser is not one of our institutional investors upon execution of the purchase agreement.
Compensation upon Acquisition
Upon Acquisition of a company (which is not an affiliate of the company), Mr. Oppenhaim will be entitled to receive a bonus of up to 12 monthly salaries subject to the approval of the compensation committee and our board of directors and subject to the limitation on a special bonus imposed by our compensation policy. An “Acquisition” includes, among others, a merger of our company or a subsidiary of our company with or into another entity, such that upon consummation of such transaction our shareholders will hold more than 50% of the surviving entity.
Directors and Officers Equity Based Compensation
As of February 16, 2021, a total of 515,912 options to purchase our ordinary shares and 272,591 RSU’s were outstanding and held by certain current executive officers and directors (consisting of 15 persons), of which 281,945 options are currently exercisable or exercisable within 60 days of February 16, 2021, 27,438 shares are held by trustee due to vested RSUs and no RSU’s will vest within 60 days of February 16, 2021. See “Item 6E. Share Ownership” in this annual report on Form 20-F.
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In accordance with our current equity-based compensation policy, the exercise price of granted options is equal to the closing sale price of the Company's ordinary shares on Nasdaq on the day of grant.
Compensation of Directors
The total amount paid or payable to the directors (consisting of six persons, not including Mr. Oppenhaim), for 2020 was $0.37 million.
The compensation arrangement of our directors (excluding the chairman of the board of directors and, unless approved otherwise, any other director who is also an employee of the Company) includes an annual payment of NIS 92,000 (approximately US$26,730) and a payment per meeting of NIS3,000 (approximately US$870) (for each execution of a written consent in lieu of a meeting, an amount of NIS 1,500 and for each meeting that the director attends by teleconference, an amount of NIS 1,800).
The compensation arrangement of Dr. Michael Brunstein, the chairman of our board of directors includes a gross annual fee of US$110,000 payable monthly in NIS.
In the 2019 annual general meeting, our shareholders approved an amendment to the equity-based compensation paid to our directors, such that each member of our board of directors (excluding the chairman) will be granted an annual award of options to purchase 3,340 ordinary shares and 2,220 restricted share units, or, options and restricted share units with an aggregate fair market value of US$100,000 (with the same ratio of options and restricted share units), the lower of the two. Such grant will be made to each director on the date of each annual general meeting at which such director is elected or reelected. Our chairman will be granted an annual award of options to purchase 15,850 ordinary shares and 10,550 restricted share units, or, options and restricted share units with an aggregate fair market value of US$600,000 (with the same ratio of options and restricted share units), the lower of the two. Such grant will be made on the date of each annual general meeting at which our chairman is elected or reelected. The exercise price of each option will be determined pursuant to our equity-based compensation policy and the equity awards will vest annually over a period of four years.
On June 17, 2019, our shareholders approved our current compensation policy, and on June 25, 2020, our shareholders approved an amendment to the compensation policy related to directors and officers liability insurance policy premium.
The full text of our current compensation policy was included as Appendix A to the proxy statement attached to our report on Form 6-K, furnished to the Securities and Exchange Commission on May 7, 2019.
6.C Board Practices
Our Amended and Restated Articles of Association, as adopted by the Company’s shareholders and recently amended on June 17, 2019, or the Articles, provide that we may have between five and nine directors. Our board of directors currently consists of seven directors, two of which are women.
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Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” including companies with shares listed on the Nasdaq Global Select Market, are required to appoint at least two external directors.
Pursuant to regulations promulgated under the Companies Law, companies with shares traded on a U.S. stock exchange, including the Nasdaq Global Select Market, may, subject to certain conditions, “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors. In accordance with these regulations, in May 2018, we elected to “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors.
Under these regulations, the exemptions from such Companies Law requirements will continue to be available to us so long as: (i) we do not have a “controlling shareholder” (as such term is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including the Nasdaq Global Select Market, and (iii) we comply with the director independence requirements, the audit committee and the compensation committee composition requirements, under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers.
Our board of directors has determined that all of our directors qualify as ‘‘independent directors’’ as defined by The Nasdaq Stock Market Rules.
Our Articles provide that directors may be elected at our annual general meeting of shareholders by a vote of the holders of more than 50% of the total number of votes represented at such meeting, not taking into consideration abstention votes. In addition, our board of directors is authorized to appoint directors, at its discretion, provided that the total number of directors does not exceed the maximum number of directors permitted by the Articles. Our directors (other than the directors who were in the position of external directors until May 2018) serve as such until the next annual general meeting of our shareholders. Effective as of May 2018, and our adoption of the exemption under the Israeli Companies Regulations (Reliefs for Public Companies whose Shares are Listed on a Stock Exchange Outside of Israel), 2000, or the Regulation, our directors in office who were elected and classified as external directors, Ms. Dafna Gruber and Ms. Zehava Simon, are no longer classified as such under the Companies Law. The transition rules set forth under the Regulation provide that such directors have the right to remain in office as our directors at their option after the exemption under the Regulation is adopted until the earlier of such directors’ original end of term of office or the second annual meeting of shareholders after the adoption of the exemption under the Regulation, which in the case of Ms. Gruber is until the date of our annual meeting of shareholders to be held in 2020, and in case of Ms. Simon is until earlier of the date of our annual meeting of shareholders to be held in 2020 and June 2020.
According to the Companies Law, the board of directors of a public company must establish the minimum number of board members that are to have accounting and financial expertise while considering, inter alia, the nature of the company, its size, the scope and complexity of its operations and the number of directors stated in the Articles.
Our board of directors resolved that the minimum number of board members that need to have accounting and financial expertise is one (1).
Our board of directors determined that each of Ms. Dafna Gruber and Ms. Zehava Simon has accounting and financial expertise as described in the regulations promulgated pursuant to the Companies Law, and that, therefore, the requirements of the minimum number of board members that need to have accounting and financial expertise, as set by the board of directors, has been met.
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Our board of directors has adopted a training program for newly appointed directors. Once appointed and following the completion of their onboard training, our directors continue to receive ongoing training as part of our directors training and development efforts.
Family Relationships
There are no family relationships between any members of our executive management and our directors.
Board of Directors’ Committees
The Company’s board of directors has appointed the following committees:
Audit Committee
Our Audit Committee is comprised of Dafna Gruber, Zehava Simon and Avi Cohen. The audit committee is responsible to provide oversight of the accounting and financial reporting process of the Company and the audits of the financial statements of the Company, and assist the Board in its oversight of (i) the integrity of the Company's financial statements and other published financial information, (ii) the Company's compliance with applicable financial and accounting related standards, rules and regulations, (iii) the selection, engagement and termination, subject to shareholder approval, of the Company's independent auditor, (iv) the pre-approval of all audit, audit-related and all permitted non-audit services, if any, by the Company's independent auditor, and the compensation therefor, (v) the Company's internal controls over financial reporting and (vi) risk assessment and risk management.
Under the Companies Law, the audit committee is responsible, among others, for (i) identifying deficiencies in the business management practices of the Company, including by consulting with the internal auditor, and recommending remedial actions with respect to such deficiencies; (ii) reviewing and approving related party transactions, including, among others, determining whether or not such transactions are deemed material actions or extraordinary transactions; (iii) ensuring that a competitive process is conducted for related party transactions with a controlling shareholder (regardless of whether or not such transactions are deemed extraordinary transactions), optionally based on criteria which may be determined by the audit committee annually in advance; (iv) setting forth the approval process for transactions that are 'non-negligible' (i.e., transactions with a controlling shareholder that are classified by the audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as determining which types of transactions would require the approval of the audit committee, optionally based on criteria which may be determined annually in advance by the audit committee; (v) evaluating the Company’s internal audit program and the performance of the Company’s internal auditor and the resources at his/her disposal; (vi) reviewing the scope of work of the Company’s external auditor and making recommendations regarding his/her salary; and (vii) creating procedures relating to the employees’ complaints regarding deficiencies in the administration of the Company as well as adopting against retaliation. The audit committee is also responsible for reviewing and approving any material change or waiver in the Company's Corporate Code of Conduct regarding directors or executive officers, and disclosures made in the Company's annual report in such regard. The audit committee operates under a charter dully adopted by the board of directors.
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Our board of directors has determined that each member of our audit committee is independent as such term is defined in Rule 10A‑3 under the Exchange Act, and that each member of our audit committee satisfies the additional requirements applicable under the Nasdaq rules to members of an audit committee.
Compensation Committee
Our Compensation Committee is comprised of Zehava Simon, Dafna Gruber, Raanan Cohen and Miron (Ronnie) Kenneth. The function of the compensation committee is described in the approved charter of the committee, and includes assisting the board of directors in discharging its responsibilities relating to compensation of the Company’s officers, directors and executives and the overall compensation programs and reviewing and approving, or if required by law, approving and recommending for approval by the board of directors, grants and awards under the Company’s equity incentive plans. The primary objective of the committee is to oversee the development and implementation of the compensation policies and plans that are appropriate for the Company in light of all relevant circumstances, and which provide incentives that fit the Company’s long-term strategic plans and are consistent with the culture of the Company and the overall goal of enhancing shareholder’s value.
Our board of directors has determined that each member of our compensation committee is independent under the Nasdaq rules, including the additional independence requirements applicable to the members of a compensation committee.
Under the Companies Law and our compensation committee charter, our compensation committee is responsible, among others, for (i) recommending to the board of directors regarding its approval of a compensation policy in accordance with the requirements of the Companies Law, and any other compensation policies, incentive-based compensation plans and equity-based plans; (ii) overseeing the development and implementation of such compensation plans and policies that are appropriate in light of all relevant circumstances and recommending to the board of directors regarding any amendments or modifications that the compensation committee deems appropriate; (iii) determining whether to approve transactions concerning the terms of engagement and employment of our officers and directors that require compensation committee approval under the Companies Law or our compensation plans and policies; and (iv) taking any further actions as the compensation committee is required or allowed to under the Companies Law or the compensation plans and policies.
Nominating Committee
Our Nominating Committee is comprised of Ronnie (Miron) Kenneth, Michael Brunstein, and Zehava Simon. The function of the nominating committee is described in the approved charter of the committee, and includes responsibility for identifying individuals qualified to become board members and recommending that the board of directors consider the director nominees for election at the general meeting of shareholders. The nominating and corporate governance committee is also responsible for developing and recommending to the board of directors a set of corporate governance guidelines applicable to the Company, periodically reviewing such guidelines and recommending any changes thereto.
Our audit committee also acts as our investment committee.
All committees are acting according to written charters that were approved by our board of directors. Additionally, we adopted an internal enforcement plan which was approved by our board of directors. The internal enforcement plan, as part of which we adopted and implementing procedures and policies in order to comply with the provisions of the Israeli Securities Law, 5728-1968 (the “Israeli Securities Law”), the Companies Law and the applicable guidelines issued by Israeli Securities Authority. The internal enforcement plan includes, among others, the board committees’ charters, procedures with respect to related party transactions, insider trading, which prohibits hedging activities, reporting and complaints, anti-bribery policy and a code of conduct. Each of our committees have the power to retain, terminate and approve the related fees and other retention terms, as it deems appropriate, outside counsel and other experts and consultants to assist the committee in connection with its responsibilities without our board of directors’ approval and at the Company's expense.
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Approval of Related Party Transaction
The Companies Law requires that office holders of a company, including directors and executive officers, promptly disclose to the board of directors any personal interest they may have and all related material information known to them about any existing or proposed transaction with such company. The approval of the board of directors is required for 'non-extraordinary' transactions between a company and its office holders, or between a company and other persons in which an office holder has a personal interest, unless such company's articles of association provide otherwise. Under the Companies Law, a 'non-extraordinary' transaction between a company or between the company and a third party in which an office holder of a company has a personal interest, will require the approval of the board of directors or a committee authorized by the board of directors, unless such company's articles of association provide otherwise. Our Articles do not provide otherwise, and therefore such transaction requires the approval of our board of directors. If a transaction is an “extraordinary transaction”, it is subject to the approval of the audit committee prior to its approval by the board of directors. For information regarding the necessary approvals under the Companies Law for transactions with office holders and directors regarding their terms of engagement with the company, see “— Compensation of Officers and Directors” in this Item below.
In addition, an extraordinary transaction between a public company and a controlling shareholder (i.e. a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from its position on the board of directors or any other position with the company), or in which a controlling shareholder has a personal interest, including a private placement in which the controlling shareholder has a personal interest, a transaction between a public company and a controlling shareholder, the controlling shareholders' relative, or entities under its control, directly or indirectly, with respect to services to be provided to the public company, and a transaction concerning the terms of compensation of the controlling shareholder or the controlling shareholder’s relative, who is an office holder or an employee, requires the approval of the audit committee or, in some cases, the compensation committee (see "— Compensation of Officers and Directors" in this Item below), the board of directors and a majority of the shares voted by the shareholders of the company participating and voting on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements: (i) the majority must include at least a majority of the shares of the voting shareholders who have no personal interest in the transaction (in counting the total votes of such shareholders, abstentions are not taken into account); or (ii) the total of opposition votes among the shareholders who have no personal interest in the transaction may not exceed 2% of the aggregate voting rights in the company. Any such transaction the term of which is more than three years, must be approved in the same manner every three years, unless with respect to certain transactions as permitted by the Companies Law, the audit committee has determined that longer term is reasonable under the circumstances.
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According to the Companies Law, if an extraordinary transaction is discussed by the board of directors or the audit committee, directors and office holders that have personal interest in the proposed transaction, may not participate in the discussion or vote. However, if the majority of the members of the audit committee or the board of directors (as applicable) have personal interest in the proposed transaction, then all directors (including those with personal interest) may participate in the discussion and vote, provided that in the event the majority of the members of the board of directors have personal interest in the transaction, said transaction will also be subject to the approval of the Company's shareholders.
Compensation of Officers and Directors
Under the Companies Law, Israeli public companies are required to establish a compensation committee and adopt a policy regarding the compensation and terms of employment of their directors and officers. For information on the composition, roles and objectives of the compensation committee pursuant to the Companies Law and our compensation committee charter, see above “—Board of Directors’ Committees — Compensation Committee" in this annual report on Form 20-F.
Pursuant to the Companies Law, the compensation policy must be approved by the company's board of directors after reviewing the recommendations of the compensation committee. The compensation policy also requires the approval of the general meeting of the shareholders, which approval must satisfy one of the following (the "Majority Requirement"): (i) the majority should include at least a majority of the shares of the voting shareholders who are non-controlling shareholders or do not have a personal interest in the approval of the compensation policy (in counting the total votes of such shareholders, abstentions are not be taken into account) or (ii) the total number of votes against the proposal among the shareholders mentioned in paragraph (i) does not exceed two percent of the aggregate voting power in the company. Under certain circumstances and subject to certain exceptions, the board of directors may approve the compensation policy despite the objection of the shareholders, provided that the compensation committee and the board of directors determines that it is for the benefit of the company, following an additional discussion and based on detailed arguments.
The Companies Law provides that the compensation policy must be re-approved (and re-considered) every three years, in the manner described above. Moreover, the board of directors is responsible for reviewing from time to time the compensation policy and deciding whether or not there are any circumstances that require an adjustment to the company's compensation policy. When approving the compensation policy, the relevant organs must take into consideration the goals and objectives listed in the Companies Law, and include reference to specific issues listed in the Companies Law. Such issues include, among others (the “Compensation Policy Mandatory Criteria”): (i) the relevant person’s education, qualifications, professional experience and achievements; (ii) such person's position within the company, the scope of his responsibilities and previous compensation arrangements with the company; (iii) the proportionality of the employer cost of such person in relation to the employer cost of other employees of the company, and in particular, the average and median pay of other employees in the company, including contract workers, and the impact of the differences between such person's compensation and the other employees' compensation on the labor relations in the company; (iv) the authority, at the board of director's sole discretion, to lower any variable compensation components or set a maximum limit (cap) on the actual value of the non-cash variable components, when paid; and (v) in the event that the terms of engagement include any termination payments - the term of employment of the departing person, the company’s performance during that term, and the departing person’s contribution to the performance of the company.
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In addition, the Companies Law provides that the following matters must be included in the compensation policy (the "Compensation Policy Mandatory Provisions"): (i) the award of variable components must be based on long term and measurable performance criteria (other than non-material variable components, which may be based on non-measurable criteria taking into account the relevant person's contribution to the performance of the company); (ii) the company must set a ratio between fixed and variable pay, set a cap on the payment of any cash variable compensation components as of the payment of such components, and set a cap on the maximum cash value all non-cash variable components as of their grant date; (iii) the compensation policy must include a provision requiring the relevant person to return to the company any compensation that was awarded on the basis of financial figures that were subsequently restated; (iv) equity based variable compensation components should have an appropriate minimum vesting periods, which should be linked to long term performance objectives; and (v) the company must set a clear limit on termination payments.
Pursuant to the Companies Law, any transaction with an office holder (except directors and the chief executive officer of the company) with respect to such office holder's compensation arrangements and terms of engagement, requires the approval of the compensation committee and the board of directors. Such transaction must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (also see above "—Board of Directors' Committees — Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. Notwithstanding the above, the compensation committee and the board of directors may, under special circumstances, approve such transaction even if the shareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve it despite the shareholder's objection, based on detailed arguments, and (ii) the company is not a 'Public Pyramid Held Company'. For the purpose hereof, a "Public Pyramid Held Company" is a public company that is controlled by another public company (including companies that issued only debentures to the public), which is also controlled by another public company (including companies that issued only debentures to the public) that has a controlling shareholder.
Transactions between public companies (including companies that have issued only debentures to the public) and their chief executive officer, with respect to his or her compensation arrangement and terms of engagement, require the approval of the compensation committee, the board of directors and the shareholder's meeting, provided that the approval of the shareholders' meeting must satisfy the Majority Requirement. Notwithstanding the above, the compensation committee and the board of directors may, under special circumstances, approve such transaction with the chief executive officer even if the shareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve it despite the shareholder's objection, based on detailed arguments, and (ii) the company is not a Public Pyramid Held Company. Such transaction with the chief executive officer must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (see above —“Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. In addition, the compensation committee may determine that such transaction with the CEO does not have to be approved by the shareholders of the company, provided that: (i) the chief executive officer is independent based on criteria set forth in the Companies Law; (ii) the compensation committee determined, based on detailed arguments, that bringing the transaction to the approval of the shareholders may compromise the chances of entering into the transaction; and (iii) the terms of the transaction are consistent with the provisions of the company's compensation policy. Under the Companies Law, non-material amendments of transactions relating to the compensation arrangement or terms of engagement of office holders (including the chief executive officer), require only the approval of the compensation committee.
With respect to transactions relating to the compensation arrangement and terms of engagements of directors in public companies (including companies that have issued only debentures to the public), the Companies Law provides that such transaction is subject to the approval of the compensation committee, the board of directors and the shareholders' meeting. Such transaction must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (see above "—Board Practices –Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement.
Pursuant to the Companies Law, a compensation policy must be re-approved (and re-considered) at least once in every three years. The current compensation policy was approved by our shareholders in June 2019, and on June 25, 2020, our shareholders approved an amendment to the compensation policy with respect to the premium payable in connection with our directors and officers liability insurance policy.
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Internal Auditor
Under the Companies Law, the board of directors must also appoint an internal auditor nominated by the audit committee. Our internal auditor is Ms. Dana Gottesman-Erlich, CPA (Isr.) of BDO Ziv Haft, an independent registered accounting firm which is a part of the BDO international accounting firm. The role of the internal auditor is to examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative. The Companies Law defines an interested party as a holder of 5% or more of the shares or voting rights of a company, any person or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person who serves as a director or as the general manager of a company. Our internal auditor is working based on a risk survey and audit plan, which is determined by our audit committee and approved by our board of directors.
6.D Employees
Set forth below is a chart showing the number of people we employed at the times indicated:
|
As of December 31, | ||||||||||||
|
2018(*) |
2019(*) |
2020(*) | ||||||||||
|
| ||||||||||||
|
Total Personnel |
662 |
646 |
713 | |||||||||
|
| ||||||||||||
|
Located in Israel |
373 |
349 |
385 | |||||||||
|
Located abroad |
289 |
297 |
328 | |||||||||
|
| ||||||||||||
|
In operations |
100 |
108 |
129 | |||||||||
|
In research and development |
275 |
251 |
300 | |||||||||
|
In global business |
242 |
247 |
263 | |||||||||
|
In general and administration |
45 |
40 |
49 | |||||||||
_______________________
(*) The numbers of employees set forth in this table do not include contractors and an insignificant number of temporary employees retained by the Company from time to time.
In the high-tech industry in general and specifically in the semiconductors industry, there is intense competition for high-skilled employees. Nova believes that the company’s future success will depend, by a large part, on our continued ability to attract, hire and retain qualified and highly motivated employees in every role and seniority level.
We were a member of the Industrialists Association in Israel, an employer’s union until December 31, 2006. Under applicable Israeli law, we and our employees are subject to protective labor provisions such as restrictions on working hours, minimum wages, paid vacation, sick pay, severance pay and advance notice of termination of employment as well as equal opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Economy and Industry make certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters such as cost of living adjustments to salaries, length of working hours and week, recuperation and travel expenses. In Israel, we are subject to the instructions of the Extension Order in the Industrial Field for Extensive Pension Insurance 2006 according to the Israeli Collective Bargaining Agreements Law, 1957 (the “Extension Order”). The Extension Order determines the pension terms of the employees which fall under its criteria.
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6.E Share Ownership
Based on information provided to us, our 15 directors and officers listed in Item 6A above, have had, as a group, sole voting and investment power for 309,383 shares beneficially owned by them as of February 16, 2021 (representing 1.1% of the 28,196,562 issued and outstanding ordinary shares of our company as of such date). Such number includes 281,945 shares subject to options that are immediately exercisable or exercisable within 60 days of February 16, 2021 (with expiration dates ranging between 2021 and 2027; exercise prices ($/share) ranging between 11.28 and 48.20), 27,438 shares held by the trustee due to vested RSUs, and no RSUs to be vested within 60 days as of February 16, 2021. Each of such directors and executive officers beneficially owned less than 1% of our company’s shares as of such date.
Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to warrants or options that are presently exercisable or exercisable within 60 days of the date of February 16, 2021 are deemed to be outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.
Employee Benefit Plans
The share option plans under which we have outstanding equity grants, are described below:
2007 Incentive Plan (which was active until October 2017) - As of December 31, 2020, options to purchase 4,304,112 ordinary shares at an exercise prices which range from $0.43 to $24.96, the fair market value of our shares on the dates of grant, were granted under this plan of which, as of December 31, 2020, 2,789,710 options were exercised, 304,598 options were outstanding and exercisable, 1,176,136 options had been cancelled and 33,668 were outstanding and unvested. As of December 31, 2020, 834,142 RSU’s had been granted, of which 722,934 had vested, 105,363 had been cancelled and 5,845 RSU's were outstanding. Following adoption of 2017 share incentive plan, as detailed herein, we have ceased granting equity under the 2007 incentive plan.
2017 Share Incentive Plan - The maximum number of ordinary shares to be issued under the plan, which was adopted by our board of directors on August 1, 2017, is 2,500,000, subject to future increases or decreases by the Company. As of December 31, 2020, options to purchase 626,262 ordinary shares at an exercise prices which range from $22.56 to $60.91, the closing price of the Company's ordinary shares on Nasdaq on the day of grant, were granted under this plan of which, as of December 31, 2020, 48,206 options were exercised, 157,497 options were outstanding and exercisable, 119,043 options had been cancelled and 301,516 were outstanding and unvested. As of December 31, 2020, 651,882 RSU’s had been granted, of which 150,276 RSU’s had vested, 38,890 had been cancelled and 462,716 RSU's were outstanding.
On June 17, 2019, our shareholders (following an approval by our compensation committee and board of directors), approved the Company's compensation policy, which includes, among others, provisions relating to equity-based compensation for Nova's executive officers.
The compensation policy provides, among others, that: (i) such equity based compensation is intended to be in a form of share options and/or other equity based awards, such as RSUs, in accordance with the Company's equity incentive plan in place as may be updated from time to time; (ii) all equity-based incentives granted to executive officers will be subject to vesting periods in order to promote long-term retention of the awarded executive officers. Unless determined otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to executive officers (other than directors) will vest gradually over a period of between three to five years; and (iii) all other terms of the equity awards will be in accordance with Nova's incentive plans and other related practices and policies. The board of directors may, following approval by the compensation committee, extend the period of time for which an award is to remain exercisable and make provisions with respect to the acceleration of the vesting period of any executive officer's awards, including, without limitation, in connection with a corporate transaction involving a change of control, subject to any additional approval as may be required by the Companies Law. The compensation policy also provides that the equity-based compensation will be granted from time to time and be individually determined and awarded according to the performance, educational background, prior business experience, qualifications, role and the personal responsibilities of the executive officer. The fair market value of the equity-based compensation for the executive officers will be determined according to acceptable valuation practices at the time of grant. Our compensation policy provides that equity-based compensation awarded to employees, executive officers or directors shall not be, in the aggregate, in excess of 10% of our share capital on a fully diluted basis at the date of the grant.
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Our equity-based compensation policy, which was initially adopted in February 2007 and was most recently amended in December 2018, provides, among others, that the exercise price for each option will be equal to the closing sale price of the Company's ordinary shares on Nasdaq on the day of grant.
For additional information regarding our employees’ incentive plans, see Note 9 of our consolidated financial statements, contained elsewhere in this report.
Item 7. Major Shareholder and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of the dates indicated below for each person who we know beneficially owns five percent or more of the outstanding ordinary shares.
Beneficial ownership of shares is determined under rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Applicable percentages are based on 28,196,562 ordinary shares outstanding as of February 16, 2021.
|
Name |
Number of Ordinary Shares Beneficially Owned |
Percentage of Ordinary Shares Beneficially Owned | ||||||
|
Harel Insurance Investments & Financial Services Ltd. (1) |
2,190,977 |
7.77 |
% | |||||
|
Wasatch Advisors Inc. (2) |
2,180,040 |
7.73 |
% | |||||
|
Menora Mivtachim Holdings Ltd. (3) |
2,108,880 |
7.48 |
% | |||||
|
Migdal Insurance & Financial Holdings Ltd. (4) |
1,934,609 |
6.86 |
% | |||||
|
Renaissance Technologies LLC. (5) |
1,688,844 |
5.99 |
% | |||||
|
Adage Capital Partners GP, L.L.C. (6) |
1,531,800 |
5.43 |
% | |||||
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(1)The information is based upon Amendment no. 7 to Schedule 13G filed with the SEC by Harel Insurance Investments & Financial Services Ltd. on January 27, 2021 regarding holdings as of December 31, 2020.
(2)The information is based upon Schedule 13G filed with the SEC by Wasatch Advisors Inc. on February 11, 2021 regarding holdings as of December 31, 2020.
(3)The information is based upon Amendment no. 4 to Schedule 13G filed with the SEC by Menora Mivtachim Holdings Ltd., Menora Mivtachim Pensions and Gemel Ltd., Menora Mivtahim Insurance Ltd., Menora Mivtachim Vehistadrut Hamehandesim Nihul Kupot Gemel Ltd. and Shomera Insurance Company Ltd. on February 11, 2021 regarding holdings as of December 31, 2020.
(4)The information is based upon Schedule 13G filed with the SEC by Migdal Insurance & Financial Holdings Ltd. on February 16, 2021 regarding holdings as of December 31, 2020.
(5)The information is based upon Amendment no. 2 to Schedule 13G filed with the SEC by Adage Capital Partners, L.P., Adage Capital Partners GP, L.L.C., Adage Capital Advisors, L.L.C., Robert Atchinson and Phillip Gross on February 11, 2021 regarding holdings as of December 31, 2020
(6)The information is based upon Amendment no. 7 to Schedule 13G filed with the SEC by Renaissance Technologies LLC and Renaissance and Renaissance Technologies Holdings Corporration on February 11, 2021 regarding holdings as of December 31, 2020.
All the shareholders of the Company have the same voting rights.
To our knowledge, the significant changes in the percentage of ownership held by our major shareholders during the past three years have been: (i) the increase in the percentage of ownership by Clal Insurance Enterprises Holdings Ltd. above 5% in 2018 and decrease below 5% in 2019; (ii) the increase in the percentage of ownership of Psagot Investment House Ltd. above 5% in 2018, and the decrease in the percentage of ownership below 5% in 2019; (iii) the decrease in the percentage of ownership of Yelin Lapidot Holdings Management Ltd., Dov Yelin, Yair Lapidot below 5% in 2018 (iv) the decrease in the percentage of ownership of Migdal Insurance & Financial Holdings below 5% in 2018 and the increase in the percentage of ownership above 5% in 2020; (v) the increase in the percentage of ownership by The Phoenix Holdings Ltd., Itshak Sharon (Tshuva), and Delek Group Ltd above 5% in 2018 and the decrease below 5% in 2020; and (vi) the increase in the percentage of ownership by Adage Capital Partners LP, Adage Capital Partners GP, L.L.C and Adage Capital Advisors L.L.C above 5% in 2019; and (vii) the increase in the percentage of ownership by Wasatch Advisors Inc. above 5% in 2020.
As of February 16, 2021, our ordinary shares were held by 12 registered holders (not including CEDE & Co.). Based on the information provided to us by our transfer agent, as of February 16, 2021, 10 registered holders were U.S. domicile holders and held approximately 0.02% of our outstanding ordinary shares.
Control of Registrant
To the Company’s knowledge, it is not owned or controlled by a foreign government. Except for the shareholders identified above owning more than five percent of the Company’s ordinary shares, the Company has no knowledge of any corporation or other natural or legal person owning a controlling interest in the Company.
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B. Related Party Transactions
In June 2020, we obtained directors’ and officers’ liability insurance for our officers and directors with coverage in an aggregate amount of $30,000,000 (including $5,000,000 Side A DIC). This directors’ and officers’ liability insurance was presented and approved by our compensation committee in accordance with the framework under our compensation policy.
Our compensation policy authorizes the Company, as long as the compensation policy is in effect, to extend and/or renew the directors’ and officers’ liability insurance or enter into a new insurance policy, provided however, that the insurance transaction complies with the following conditions: (i) the annual premium to be paid by us will not exceed 9% of the aggregate coverage of the insurance policy; (ii) the limit of liability of the insurer will not exceed the greater of $50 million or 30% of our shareholders equity based on our most recent financial statements at the time of approval by the compensation committee; and (iii) the insurance policy, as well as the limit of liability and the premium for each extension or renewal will be approved by the compensation committee (and, if required by law, by the board of directors) which will determine that the sums are reasonable considering our exposures, the scope of coverage and the market conditions and that the insurance policy reflects the current market conditions, and it will not materially affect our profitability, assets or liabilities.
Further, upon circumstances to be approved by the compensation committee (and, if required by law, by the board of directors), we will be entitled to enter into a "run off" insurance policy of up to seven years, with the same insurer or any other insurance, as follows: (i) the limit of liability of the insurer will not exceed the greater of $50 million or 30% of our shareholders equity based on our most recent financial statements at the time of approval by the compensation committee; (ii) the annual premium will not exceed 300% of the last paid annual premium; and (iii) the insurance policy, as well as the limit of liability and the premium for each extension or renewal will be approved by the compensation committee (and, if required by law, by the board of directors) which shall determine that the sums are reasonable considering our exposures covered under such policy, the scope of cover and the market conditions, and that the insurance policy reflects the current market conditions and that it will not materially affect our profitability, assets or liabilities.
We may also extend the insurance policy in place to include cover for liability pursuant to a future public offering of securities as follows: (i) the additional premium for such extension of liability coverage will not exceed 50% of the last paid annual premium; and (ii) the insurance policy as well as the additional premium will be approved by the compensation committee (and if required by law, by the board of directors) which will determine that the sums are reasonable considering the exposures pursuant to such public offering of securities, the scope of cover and the market conditions and that the insurance policy reflects the current market conditions, and it does not materially affect our profitability, assets or liabilities.
In addition, we undertook to indemnify our officers and directors up to an aggregate amount of 25% of the Company’s shareholders’ equity, according to the most recent consolidated financial statement prior to the date of indemnification payment. Pursuant to our amended and restated compensation policy, we may indemnify our directors and officers to the fullest extent permitted by applicable law, for any liability and expense that may be imposed on the director or the officer, as provided in the indemnity agreement between us and such individuals, all subject to applicable law and our articles of association. Our amended and restated compensation policy also provides that we may exempt our directors and officers in advance for all or any of their liability for damage in consequence of a breach of the duty of care vis-a-vis our company, to the fullest extent permitted by applicable law.
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For information relating to options granted to officers and directors, see “Item 6E. Share Ownership” in this annual report on Form 20-F. For information regarding our compensation policy and compensation arrangements with our directors and executive officers (including our chairman and chief executive officer), please refer to “Item 6B. Compensation” in this annual report on Form 20-F.
7.C Interest of Experts and Counsel
Not applicable.
Item 8. Financial Information
8.AConsolidated Statements and Other Financial Information
See “Item 17. Financial Statements” in this annual report on Form 20-F.
Legal Proceedings
From time to time, we or our subsidiaries may be a party to legal proceedings and claims in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, we do not believe they will have a material effect on our consolidated financial position, results of operations, or cash flows.
We are currently not involved in any significant legal proceedings.
Dividend Policies
We anticipate that, for the foreseeable future, we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends for at least the next several years.
The distribution of dividends may be limited by the Companies Law, which permits the distribution of dividends only out of retained earnings or earnings derived over the two most recent fiscal years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent a company from satisfying its existing and foreseeable obligations as they become due. Our Amended and Restated Articles of Association provide that dividends will be paid at the discretion of, and upon resolution by, our board of directors.
In addition, distribution of dividends may be subject to certain tax implication. For additional information regarding tax implication of dividends' distribution, see “Item 10E. Taxation – Israeli Taxation” in this annual report on Form 20-F.
Export Sales
Substantially all of our products are sold to customers located outside Israel and the United States.
8.BSignificant Changes
Not applicable.
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Item 9. The Offer and Listing
9.AOffer and Listing Details
Our ordinary shares began trading on Nasdaq on April 11, 2000 under the symbol “NVMI”. Our ordinary shares were registered for trading on the Tel Aviv Stock Exchange Ltd. in 2002 under the symbol “נובה”.
9.BPlan of Distribution
Not applicable.
9.CMarkets
Our ordinary shares are quoted on the Nasdaq Global Select Market under the symbol “NVMI” and on the Tel Aviv Stock Exchange Ltd.
9.DSelling Shareholders
Not applicable.
9.EDilution
Not applicable.
9.FExpenses on the Issue
Not applicable.
Item 10. Additional Information
10.AShare Capital
Not applicable.
10.BMemorandum and Articles of Association
A copy of our amended and restated articles of association is attached as Exhibit 1.1 to this annual report on Form 20-F. The information called for by this Item is set forth in Exhibit 2.1 to this annual report on Form 20-F and is incorporated by reference into this annual report on Form 20-F.
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10.CMaterial Contracts
Israeli Lease Agreement
On May 3, 2018, we entered into a lease agreement, or the Lease Agreement, with Bayside Land Corporation Ltd., or Bayside.
Pursuant to the Lease Agreement, we are currently leasing from Bayside a total of approximate 10,000 square meters, or the Initial Space, in a new building at the Science Park in Rehovot.
The lease period for the Initial Space extends until 2029, or the Initial Lease Period. We have the option to extend the lease period by two periods of five years each, subject to customary conditions.
The Lease agreement also includes a leasing of an additional space of approximately 2,000 square meters, or the Additional Space, which is expected to begin in 2021, and will extend through the same lease periods as the Initial Space.
These leases cannot be terminated by us during the Initial Lease Period. Under certain circumstances, Bayside may terminate the Agreement in the event of change of control in the Company.
The average monthly lease, parking and management costs for the Initial Space in the Initial Lease Period are approximately NIS 700,000 per month. During each of the additional lease option periods, the monthly lease and parking payments for the Initial Space will be increased by 2.5%. The monthly lease, parking and management costs for the Additional Space are expected to be approximately NIS 180,000 per month. The monthly lease, parking and management costs are linked to the Israeli consumer price index.
On February 3, 2019, we entered into a construction contractor agreement with A. Weiss Construction and Supervision Ltd. in order to set the terms under which the contractor will perform the main construction and adjustment works in connection our new Israeli Lease Agreement. The services include, among others, adjustments of electro-mechanical systems as well as works related to electricity, plumbing, air conditioning, flooring, cladding and carpentry, all in accordance with the specifications, plans and the quantities schedule (Ktav-Kamuyot) enclosed to the agreement. Following our transition to the new facilities, most of the obligations related to this agreement have already been executed and paid for. The agreement may be terminated by us for convenience, by providing to the Contractor a seven-day prior written notice.
For a description of our issuance of convertible notes, see Note 16 to our consolidated financial statements included within this annual report.
10.DExchange Controls
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.
Dividends, if any, paid to holders of our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freely repatriable dollars at the rate of exchange prevailing at the time of conversion.
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10.ETaxation
Israeli Taxation
The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to persons owning our ordinary shares. 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 this kind of investor include traders in securities who are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on a new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax considerations.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax on their taxable income at the rate of 23% for the 2018 tax year and thereafter. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Beneficiary Enterprise, a Preferred Enterprise, a Special Preferred Enterprise, a Preferred Technology Enterprise or Special Preferred Technology Enterprise (as discussed below) may be lower. Capital gains derived by an Israeli company are generally subject to the prevailing regular corporate tax rate.
Income Tax Regulations (Rules on Bookkeeping by Foreign Invested Companies and Certain Partnerships and Determination of their Taxable Income), 1986
As a “foreign invested company” (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's management has elected to apply Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986. Accordingly, its taxable income or loss is calculated in US Dollars.
Tax Benefits under the Law for the Encouragement of Capital Investments, 1959
Tax benefits prior to the 2005 Amendment
The Law for the Encouragement of Capital Investments, 1959, generally referred to as the “Investments Law”, provides that a capital investment in eligible facilities may, upon application to the Israeli Authority for Investments and Development of the Industry and Economy (the “Investment Center”), be granted the status of an Approved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its financial scope, including sources or funds, and by its physical characteristics or the facility or other assets, e.g., the equipment to be purchased and utilized pursuant to the program.
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A company owning an Approved Enterprise is eligible for a combination of grants and tax benefits (the “Grant Track”). The tax benefits under the Grant Track include, among others, accelerated depreciation and amortization for tax purposes. The benefits period is ordinarily seven years commencing with the year in which the Approved Enterprise first generates taxable income. The benefits period is limited to 12 years from the earlier of the commencement of production by the Approved Enterprise or 14 years from the date of approval of the Approved Enterprise.
A company owning an Approved Enterprise may elect to forego its entitlements to grants and tax benefits under the Grant Track and apply for alternative package of tax benefits for a benefit period of between seven and ten years (the “Alternative Track”). Under the Alternative Track, a company’s undistributed income derived from the Approved Enterprise will be exempt from corporate tax for a period of between two and ten years, starting from the first year the company derives taxable income under the Approved Enterprise program. The length this exemption will depend on the geographic location of the Approved Enterprise within Israel. After the exemption period lapses, the company subject to tax at a reduced corporate tax rate between of 10% to 25% depending on the level of foreign investment in the company in each year for the remainder of the benefits period.
We elected to be taxed under the Alternative Track. A company that has elected the Alternative Track and subsequently pays a dividend out of income derived from the Approved Enterprise during the tax exemption period will be subject to corporate tax on the amount that is determined by the distributed amount (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) with the effective corporate tax rate which would have been applied had the company not elected the Alternative Track, which is at ranged between 10%-25%, depending on the level of foreign investment in the company in each year.
Under the Alternative Track, dividends paid by a company are considered to be attributable to income received from the entire company and the company’s effective tax rate is the result of a weighted average of the various applicable tax rates, excluding any tax-exempt income. Under the Investments Law, a company that has elected the Alternative Track is not obliged to distribute retained profits, and may generally decide from which year’s profits to declare dividends.
We currently intend to reinvest any income derived from our Approved Enterprise program and not to distribute such income as a dividend. See also Note 11B to our consolidated financial statements contained elsewhere in this report.
Tax benefits under the 2005 Amendment
An amendment to the Investments Law, which is effective as of April 1, 2005, has changed certain provisions of the Investments Law, or the 2005 Amendment. An eligible investment program under the 2005 Amendment qualifies for benefits as a “Beneficiary Enterprise” (rather than as an Approved Enterprise, which status is still applicable for investment programs approved prior to April 1, 2005 and/or investment programs under the Grant Track). According to the 2005 Amendment, only Approved Enterprises receiving cash grants require the prior approval of the Investment Center. As a result, a company is no longer required to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternative benefits program. Rather, 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. A company that has a Beneficiary Enterprise may, at its discretion, approach the ITA for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law.
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The duration of the tax benefits described herein is limited to the earlier of seven (7) or ten (10) years (depending on the geographic location of the Beneficiary Enterprise within Israel) from the Commencement Year (as described below) or 12 or 14 years from the first day of the Year of Election (as described below), depending on the location of the company within Israel. Commencement Year is defined as the later of the first tax year in which a company had derived liable income for tax purposes from the Beneficiary Enterprise, or the Year of Election, which is defined as the year in which a company requested to have the tax benefits apply to the Beneficiary Enterprise. The tax benefits granted to a Beneficiary Enterprise are determined, depending on the geographic location of the Beneficiary Enterprise within Israel.
Similar to the currently available Alternative Track, exemption from corporate tax may be available on undistributed income for a period of two to ten years, depending on the geographic location of the Beneficiary Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each year. If the company pays a dividend out of income derived from the Beneficiary Enterprise during the benefits period and such dividend is actually paid at any time up to 12 years thereafter, except with respect to a foreign investment company (an “FIC”), in which case the 12-year limit does not apply, such income will be subject to withholding tax at the rate of 15% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA, allowing for a reduced tax rate). A Company that pays dividend out of income derived from the Beneficiary Enterprise during the tax exemption period will be subject to tax with respect to the amount distributed (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable.
The benefits available to a Beneficiary Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index and interest, or other monetary penalty.
As a result of the 2005 Amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income.
We had three Approved Enterprise plans under the Investments Law, which entitled us to certain tax benefits. In addition, in 2011, based on Company investments in property and equipment in the years 2008 and 2009, the Company submitted the applicable form as a Benefited Enterprise in accordance with the 2005 Amendment to the Investments Law. The year of election was 2010.
Tax benefits under the 2011 Amendment
On December 29, 2010, the Israeli Parliament approved the 2011 amendment to the Investments Law (the “2011 Amendment”). The 2011 Amendment significantly revised the tax incentive regime in Israel, commencing on January 1, 2011.
The 2011 Amendment introduced a new status of “Preferred Enterprise”, replacing the existed status of “Beneficiary Enterprise” and introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise. A Preferred Company is an industrial company that meets certain conditions (including a minimum threshold of 25% export). However, under the 2011 Amendment the requirement for a minimum investment in productive assets in order to be eligible for the benefits granted under the Investments Law as with respect to “Beneficiary Enterprise” was cancelled.
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A Preferred Company is entitled to a reduced flat tax rate with respect to its preferred income attributed to the Preferred Enterprise, at the following rates:
|
Tax Year |
Development Region “A” |
Other Areas within Israel |
|
2011-2012 |
10% |
15% |
|
2013 |
7% |
12.5% |
|
2014-2016 |
9% |
16% |
|
2017 onwards |
7.5% |
16% |
* In December 2016, the Israeli Parliament (the Knesset) approved an amendment to the Investments Law pursuant to which the tax rate applicable to Preferred Enterprises in Development Region "A" would be reduced to 7.5% as of January 1, 2017.
The classification of income generated from the provision of usage rights in know-how or software that were developed in the Preferred Enterprise, as well as royalty income received with respect to such usage, as preferred income is subject to the issuance of a pre-ruling from the ITA stipulates that such income is associated with the productive activity of the Preferred Enterprise in Israel.
In addition, the 2011 Amendment introduced a new status of “Special Preferred Company” which is an Industrial company meeting, in addition to the conditions prescribed for “Preferred Company” certain additional conditions (including that the total Preferred Enterprise income is at least NIS 1 1 billion in 2017 and thereafter). The tax rate applicable for a period of 10 years to income generated by such an enterprise will be reduced to 5%, if located in Development Region “A”, or to 8%, if located in other area within the State of Israel.
Dividends distributed from preferred income which is attributed to a “Preferred Enterprise” or a “Special Preferred Enterprise” will be subject to withholding tax at source at the following rates: (i) Israeli resident corporations – 0% (although, if such dividends are subsequently distributed 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), (ii) Israeli resident individuals – 20% (iii) non-Israeli residents - 20% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).
The 2011 Amendment also revised the Grant Track to apply only to the approved programs located in Development Region “A” and shall provide not only cash grants (as prior to the 2011 Amendment) but also the granting of loans. The rates for grants and loans shall not be fixed but up to 20% of the amount of the approved investment. In addition, a company owning a Preferred Enterprise under the Grant Track may be entitled also to the tax benefits which are prescribed for a Preferred Enterprise.
The provisions of the 2011 Amendment do not apply to existing “Beneficiary Enterprises” or “Approved Enterprises”, which will continue to be entitled to the tax benefits under the Investments Law, as has been in effect prior to the 2011 Amendment, unless the company owning such enterprises had made an election to apply the provisions of the 2011 Amendment (such election cannot be later rescinded), which is to be filed with the ITA, not later than the date prescribed for the filing of the company’s annual tax return for the respective year. A company owning a Beneficiary Enterprise or Approved Enterprise which made such election by June 30, 2015, will be entitled to distribute income generated by the Approved/Beneficiary Enterprise to its Israeli corporate shareholders tax free.
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Until the end of 2015, we did not utilize tax benefits related to Preferred Enterprises. In 2016, we started utilizing such benefits, with a related tax rate of 12%.
The New Technological Enterprise Incentives Regime—the 2017 Amendment
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and 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 new incentives regime will apply to “Preferred Technological Enterprises” that meet certain conditions, including: (1) the R&D expenses in the three years preceding the tax year were at least 7% on average of one year out of the company's turnover or exceeded NIS 75 million (approximately $21 million) for a year; and (2) one of the following: (a) at least 20% of the workforce (or at least 200 employees) are employees whose full salary has been paid and reported in the Company’s financial statements as R&D expenses; (b) a venture capital investment approximately equivalent to at least NIS 8 million was previously made in the company and the company did not change its line of business; (c) growth in sales by an average of 25% or more, over the three years preceding the tax year, provided that the turnover was at least NIS 10 million (approximately $2.8 million), in the tax year and in each of the preceding three years; or (d) growth in workforce by an average of 25% or more, over the three years preceding the tax year, provided that the company employed at least 50 employees, in the tax year and in each of the preceding three years.
A “Special Preferred Technological Enterprise” is an enterprise that meets conditions 1 and 2 above, and in addition has total annual consolidated revenues at least NIS 10 billion (approximately $2.8 billion).
Preferred Technological Enterprises will be subject to a reduced corporate tax rate of 12% on their income that qualifies as “Preferred 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 Region "A". These corporate tax rates shall apply only with respect to the portion of intellectual property developed in Israel. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefited Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefited Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million (approximately $56 million), and the sale receives prior approval from the IIA. Special Preferred Technological Enterprises will be subject to 6% on “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 “Beneficiary Intangible Assets” to a related foreign company if the Beneficiary Intangible Assets were either developed by the Special Preferred Technology Enterprise or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from the IIA.
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A Special Preferred Technology Enterprise that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million (approximately $142 million), will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld. If such dividends are, distributed to a foreign company that holds solely or together with other foreign companies at least 90% of the shares of 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 reviewed the criteria for the tax rate of a “Special Preferred Technological Enterprise” and concluded that we are entitled to the reduced tax rate under the “Preferred Technological Enterprises” tax incentive regime starting 2017. We have notified the ITA that we elected applying this status starting 2017. We cannot asses at this stage the ITA position.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law defines “Industrial Company” as an Israeli resident company which was incorporated in Israel, of which 90% or more of its income in any tax year (exclusive of income from certain government loans) is generated from an “Industrial Enterprise” that it owns and located in Israel or in the “Area”, in accordance with the definition under section 3A of the Israeli Income Tax Ordinance (New Version) 1961, or the Ordinance. An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial manufacturing.
An Industrial Company is entitled to certain tax benefits, including: (i) an amortization of the cost of purchased patent, the right to use patent or know-how that were purchased in good faith and are used for the development or promotion of the Industrial Enterprise, over an eight-year period, beginning from the year in which such rights were first used, (ii) the right to elect to file consolidated tax returns with additional Israeli Industrial Companies controlled by it, and (iii) the right to deduct expenses related to public offerings in equal amounts over a period of three years beginning from the year of the offering.
Eligibility for benefits under the Encouragement of Industry Law is not contingent upon the approval of any governmental authority.
We believe that we qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law. There is no assurance that we qualify or will continue to qualify as an Industrial Company or that the benefits described above will be available to us in the future.
Taxation of the Company Shareholders
Capital Gains
Capital gain tax is imposed on the disposition of capital assets by an Israeli resident, and on the disposition of such assets by a non-Israel resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Ordinance distinguishes between “Real Gain” and the “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli Consumer Price Index (CPI) or, in certain circumstances, according to the change in the foreign currency exchange rate, between the date of purchase and the date of disposition.
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Generally, the capital gain accrued by individuals on the sale of our ordinary shares will be taxed at the rate of 25%. However, if the individual shareholder is a “Controlling 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 one of the Israeli resident company’s means of control) at the time of sale or at any time during the preceding twelve (12) months period (or claims a deduction for interest and linkage differences expenses in connection with the purchase and holding of such shares), such gain will be taxed at the rate of 30%.
The Real Gain derived by corporations will be generally subject to the ordinary corporate tax rate (23% in 2018 and thereafter).
Individual and corporate shareholder dealing in securities in Israel are taxed at the tax rates applicable to business income – 23% for corporations in 2018 and thereafter and a marginal tax rate of up to 47% in 2020 for individuals, unless the benefiting provisions of an applicable treaty applies.
Notwithstanding the foregoing, capital gain derived from the sale of our ordinary shares by a non-Israeli shareholder may be exempt under the Ordinance from Israeli taxation provided that the following cumulative conditions, among other things, are met: (i) the shares were purchased upon or after the registration of the securities on the stock exchange, (ii) the seller does not have a permanent establishment in Israel to which the derived capital gain is attributed. ; and (iii) with respect to our ordinary 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. Non-Israeli corporations will not be entitled to the foregoing exemptions if (i) an Israeli resident has a controlling interest, directly or indirectly, alone or together with another (i.e., together with a relative, or together with someone who is not a relative but with whom, according to an agreement, there is regular cooperation in material matters of the company, directly or indirectly), or together with another Israeli resident, exceed 25% in one or more of the means of control in such non-Israeli resident corporation or (ii) Israeli residents are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli resident corporation, whether directly or indirectly.
In addition, the sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital gain tax in connection with such sale, exchange or disposition provided, among others (i) the U.S. resident owned, directly or indirectly, less than 10% of an Israeli resident company’s voting power at any time within the 12 month period preceding such sale; (ii) the seller, being an individual, is present in Israel for a period or periods of less than 183 days in the aggregate at the taxable year; and (iii) the capital gain from the sale was not derived through a permanent establishment of the U.S. resident which is maintained in Israel the capital gain arising from such sale, exchange or disposition is not attributed to real estate located in Israel; (v) the capital gains arising from such sale, exchange or disposition is not attributed to royalties; and (vi) the shareholder is a U.S. resident (for purposes of the U.S.-Israel Double Tax Treaty) is holding the shares as a capital asset. However, under the U.S.-Israel Double Tax Treaty, a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Double Tax Treaty does not provide such credit against any U.S. state or local taxes.
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Either the purchaser, the stockbrokers or financial institution, through which payment to the seller is made, are obliged, subject to the above-mentioned exemptions, to withhold Israeli tax at source from such payment. 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, in the form of a merger or otherwise, the ITA may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the ITA to confirm their status as non-Israeli resident.
At the sale of securities traded on a stock exchange a detailed return, including a computation of the tax due, must be filed and an advanced payment must be paid on January 31 and July 31 of every tax year in respect of sales of securities made within the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Ordinance and regulations promulgated thereunder the aforementioned return need not be filed and no advance payment must be paid. Capital gain is also reportable on the annual income tax return.
Dividends
A distribution of dividends from income, which is not attributed to an Approved Enterprise/Beneficiary Enterprise/Preferred Enterprise to an Israeli resident individual, will generally be subject to income tax at a rate of 25%. However, a 30% tax rate will apply if the dividend recipient is a “Controlling Shareholder” (as defined above) at the time of distribution or at any time during the preceding 12 months period. If the recipient of the dividend is an Israeli resident corporation, such dividend will be exempt from income tax provided the income from which such dividend is distributed was derived or accrued within Israel.
Distribution of dividends from income attributed to a Preferred Enterprise is generally subject to a withholding tax at source at the rate of 20%. However, if such dividends are distributed to an Israeli company, no withholding tax is imposed (although, if such dividends are subsequently distributed 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 (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for an exemption). Dividends distributed from income attributed to an Approved Enterprise and/or a Beneficiary Enterprise are generally subject to a withholding tax at source at the rate of 15%. Those rates may be further reduced under the provisions of any applicable double tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).
The Ordinance generally provides that a non-Israeli resident (either individual or corporation) is subject to an Israeli income tax on the receipt of dividends at the rate of 25% (30% if the dividends recipient is a “Controlling Shareholder” (as defined above), at the time of distribution or at any time during the preceding 12 months period); those rates are subject to a reduced tax rate under the provisions of an applicable double tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). For example, under the U.S.-Israel Double Tax Treaty the following rates will apply in respect of dividends distributed by an Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding shares of the voting stock of the Israeli resident paying corporation and not more than 25% of the gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain type of interest or dividends – the maximum tax rate is 12.5% on dividends, not generated by an Approved Enterprise or Beneficiary Enterprise, (ii) if both the conditions mentioned in section (i) above are met and the dividend is paid from an Israeli resident company’s income which was entitled to a reduced tax rate applicable to an Approved Enterprise or Beneficiary Enterprise – the tax rate is 15%, and (iii) in all other cases, the tax rate is 25%, or the domestic rate (if such is lower). The aforementioned rates under the U.S.-Israel Double Tax Treaty will not apply if the dividend income was derived through a permanent establishment of the U.S. resident maintained in Israel.
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If the dividend is attributable partly to income derived from an Approved Enterprise, a Beneficiary Enterprise or a Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income.
Payors of dividends on our shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through which the securities are held, are generally required, subject to any of the foregoing exemption, reduced tax rates and the demonstration of a shareholder of his, her or its foreign residency, to withhold taxes upon the distribution of dividends at a rate of 25%, provided that the shares are registered with a Nominee Company (for corporations and individuals, whether the recipient is a Controlling Shareholder or not).
A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel 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).
Excess Tax
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 3% on annual income exceeding NIS 651,600 for 2020 and thereafter, which amount is linked to the Israeli Consumer Price Index)), including, but not limited to income derived from dividends, interest and capital gains.
Foreign Exchange Regulations
Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is generally required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of currency exchange control has not been eliminated, and may be restored at any time by administrative action.
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U.S. Taxation
The following discussion describes certain material United States (“U.S.”) federal income tax consequences generally applicable to U.S. holders (as defined below) of the purchase, ownership and disposition of our ordinary shares. This summary addresses only holders who acquire and hold ordinary shares as “capital assets” for U.S. federal income tax purposes (generally, assets held for investment purposes).
For purposes of this discussion, a “U.S. holder” is a beneficial owner of ordinary shares who is:
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An individual citizen or resident of the U.S. (as determined under U.S. federal income tax rules);
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a corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S., any state thereof, or the District of Columbia;
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust, if (a) a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions; or (b) the trust has in effect a valid election in effect under applicable Treasury Regulations (as defined below) to be treated as a United States person.
This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase, hold or dispose of the Company’s ordinary shares. In addition, the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws is not considered. This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations) (the “Treasury Regulations”), rulings, current administrative interpretations and official pronouncements by the Internal Revenue Service (the “IRS”), and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, with a retroactive effect. Such changes could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the holder’s particular circumstances, including, but not limited to:
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persons who own, directly, indirectly or constructively, 10% or more (by voting power or value) of our outstanding voting shares;
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persons who hold the ordinary shares as part of a hedging, straddle or conversion transaction;
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persons whose functional currency is not the U.S. dollar;
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persons who acquire their ordinary shares in a compensatory transaction;
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broker-dealers;
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insurance companies;
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regulated investment companies;
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real estate investment companies;
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qualified retirement plans, individual retirement accounts and other tax-deferred accounts;
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traders who elect to mark-to-market their securities;
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tax-exempt organizations;
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banks or other financial institutions;
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persons subject to special tax accounting rules as a result of any item of gross income with respect to ordinary shares being taken into account in an applicable financial statement;
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U.S. expatriates and certain former citizens and long-term residents of the United States; and
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persons subject to the alternative minimum tax.
The tax treatment of a partner in a partnership (or other entity or arrangement classified as a partnership for U.S. federal income tax purposes) may depend on both the partnership’s and the partner’s status and the activities of the partnership. Partnerships (or other entities or arrangements classified as a partnership for U.S. federal income tax purposes) that are beneficial owners of ordinary shares, and their partners and other owners, should consult their own tax advisers regarding the tax consequences of the acquisition, ownership and disposition of ordinary shares.
THIS SUMMARY OF MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO IT OF AN INVESTMENT IN THE ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE UNITED STATES FEDERAL INCOME TAX LAWS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY FOREIGN, STATE OR LOCAL JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
Distributions on the Ordinary Shares
We currently do not intend to distribute dividends for at least the next several years. However, if we make any distributions of cash or other property to a U.S. holder of our ordinary shares, the amount of the distribution for U.S. federal income tax purposes will equal the amount of cash and the fair market value of any property distributed and will also include the amount of Israeli taxes withheld, if any, as described above under “[Israel Taxation] — Dividends” above. In general (and subject to the PFIC rules discussed below), any distribution paid by us on the ordinary shares to a U.S. holder will be treated as dividend income to the extent the distribution does not exceed our current and/or accumulated earnings and profits, as determined under U.S. federal income tax principles. The amount of any distribution which exceeds these earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax basis in its ordinary shares to the extent thereof, and then as capital gain income (long-term capital gain if the U.S. holder’s holding period exceeds one year), from the deemed disposition of the ordinary shares (subject to the PFIC rules discussed below). Corporate holders generally will not be allowed a deduction for dividends received on the ordinary shares.
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The amount of any dividend paid in NIS (including amounts withheld to pay Israeli withholding taxes) will equal the U.S. dollar value of the NIS calculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. holder, regardless of whether the NIS are converted into U.S. dollars. A U.S. holder will have a tax basis in the NIS equal to their U.S. dollar value on the date of receipt. If the NIS received are converted into U.S. dollars on the date of receipt, the U.S. holder should generally not be required to recognize foreign currency gain or loss in respect of the distribution. If the NIS received are not converted into U.S. dollars on the date of receipt, a U.S. holder may recognize foreign currency gain or loss on a subsequent conversion or other disposition of the NIS. Such gain or loss will be treated as U.S. source ordinary income or loss.
Dividends paid by us generally will be foreign source, “passive income” for U.S. foreign tax credit purposes. U.S. holders may elect to claim as a foreign tax credit against their U.S. federal income tax liability the Israeli income tax withheld from dividends received on the ordinary shares. The Code provides limitations on the amount of foreign tax credits that a U.S. holder may claim. U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only for a year in which these U.S. holders elect to do so for all foreign income taxes. The rules relating to foreign tax credits are complex (and may also be impacted by the tax treaty between the United States and Israel), and you should consult your tax advisor to determine whether you would be entitled to this credit.
Under current law, certain distributions treated as dividends that are received by an individual U.S. holder from a “qualified foreign corporation” generally qualify for a 20% reduced maximum tax rate so long as certain holding period and other requirements are met. A non-U.S. corporation (other than a corporation that is treated as a PFIC with respect to the U.S. holder for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. Dividends paid by us in a taxable year in which we are not a PFIC and with respect to which we were not a PFIC in the preceding taxable year with respect to the U.S. holder are expected to be eligible for the 20% reduced maximum tax rate, although we can offer no assurances in this regard. However, any dividend paid by us in a taxable year in which we are a PFIC or were a PFIC in the preceding taxable year with respect to the U.S. holder will be subject to tax at regular ordinary income rates (along with any applicable additional PFIC tax liability, as discussed below).
The additional 3.8% tax on “net investment income” (described below) may apply to dividends received by certain U.S. holders who meet certain modified adjusted gross income thresholds.
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Sale, Exchange or Other Taxable Disposition of the Ordinary Shares
Upon the sale, exchange or other taxable disposition of the ordinary shares (subject to the PFIC rules discussed below), a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. holder’s tax basis in the ordinary shares. The gain or loss recognized on the sale or exchange of the ordinary shares generally will be long-term capital gain (currently taxable at a reduced rate for non-corporate U.S. holders) or loss if the U.S. holder’s holding period of the ordinary shares is more than one year at the time of the disposition. The deductibility of capital losses is subject to limitations.
Gain or loss recognized by a U.S. holder on a sale or exchange of ordinary shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. Under the tax treaty between the United States and Israel, gain derived from the sale, exchange or other taxable disposition of ordinary shares by a holder who is a resident of the U.S. for purposes of the treaty and who sells the ordinary shares within Israel may be treated as foreign source income for U.S. foreign tax credit purposes.
The additional 3.8% tax on “net investment income” (described below) may apply to certain U.S. holders who meet certain modified adjusted gross income thresholds, including capital gains.
Passive Foreign Investment Companies
In general, a foreign (i.e., non-U.S.) corporation will be a PFIC for any taxable year in which, after applying the relevant look-through rules with respect to the income and assets of its subsidiaries, either (1) 75% or more of its gross income in the taxable year is “passive income,” or (2) assets held for the production of, or that produce, passive income comprise 50% or more of the average of its total asset value in the taxable year. For purpose of the income test, passive income generally includes dividends, interest, royalties, rents, annuities and net gains from the disposition of assets, which produce passive income. For purposes of the asset test, assets held for the production of passive income includes assets held for the production of, or that produce dividends, interest, royalties, rents, annuities, and other income that are considered passive income for purposes of the income test. In determining whether we meet the asset test, cash is considered a passive asset and the total value of our assets generally will be treated as equal to the sum of the aggregate fair market value of our outstanding stock plus our liabilities. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income. The income test is conducted at the taxable year-end. The asset test is conducted on a quarterly basis and the quarterly results are then averaged together.
If a corporation is treated as a PFIC for any year during a U.S. holder’s holding period and the U.S. holder does not timely elect to treat the corporation as a “qualified electing fund” under Section 1295 of the Code or elect to mark its ordinary shares to market (both elections described below), any gain on the disposition of the shares will be treated as ordinary income, rather than capital gain, and the holder will be required to compute its tax liability on that gain, as well as on dividends and other distributions, as if the income had been earned ratably over each day in the U.S. holder’s holding period for the shares. The portion of the gain and distributions allocated to prior taxable years in which a corporation was a PFIC will be ineligible for any preferential tax rate otherwise applicable to any “qualified dividend income” or capital gains, and will be taxed at the highest ordinary income tax rate in effect for each taxable year to which this portion is allocated. An interest charge will be imposed on the amount of the tax allocated to these taxable years. A U.S. holder may elect to treat a corporation as a qualified electing fund only if the corporation complies with requirements imposed by the IRS to enable the shareholder and the IRS to determine the corporation’s ordinary earnings and net capital gain. Additionally, if a corporation is a PFIC, a U.S. holder who acquires shares in the corporation from a decedent generally will be denied the normally available step-up in tax basis to fair market value for the shares at the date of death of the decedent and instead will have a tax basis equal to the decedent’s tax basis if lower than fair market value. These adverse tax consequences associated with PFIC status could result in a material increase in the amount of tax that a U.S. holder would owe and an imposition of tax earlier than would otherwise be imposed and additional tax form filing requirements. Unless otherwise provided by the IRS, if a corporation is classified as a PFIC, a U.S. person that is a direct or indirect holder generally will be required to file IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form, to report its ownership interest in such entity.
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If a corporation is treated as a PFIC with respect to a U.S. holder for any taxable year, the U.S. holder will be deemed to own shares in any of the foreign entities in which such corporation holds equity interests that are also PFICs (or “lower-tier PFICs”), and the U.S. holder may be subject to the tax consequences described above with respect to the shares of such lower-tier PFIC such U.S. holder would be deemed to own.
Status of Nova as a PFIC. Under the income test, less than 75% of our gross income was passive income in 2020. Under the asset test, while we continued to have substantial amounts of cash and short-term deposits and the market value of our ordinary shares continued to be volatile, a determination of the value of our assets by reference to the average market value of our ordinary shares and our liabilities results in a conclusion that the average value of our passive assets did not exceed 50% of the average value of our gross assets in 2020. Nonetheless, there is a risk that we were a PFIC in 2020 or we will be a PFIC in 2021 or subsequent years. Additionally, due to the complexity of the PFIC provisions and the limited authority available to interpret such provisions, there can be no assurance that our determination regarding our PFIC status could not be successfully challenged by the IRS.
Available Elections. If we become a PFIC for any taxable year, an election to treat us as a “qualified electing fund” or to “mark-to-market” our ordinary shares may mitigate the adverse tax consequences of PFIC status to a U.S. holder.
If a U.S. holder makes a qualified electing fund election (a “QEF election”) for its ordinary shares that is effective from the first taxable year that the U.S. holder holds our ordinary shares and during which we are a PFIC, the electing U.S. holder will avoid the adverse consequences of our being classified as a PFIC, but will instead be required to include in income a pro rata share of our net capital gain, if any, and other earnings and profits (“ordinary earnings”) as long-term capital gains and ordinary income, respectively, on a current basis, in each case whether or not distributed, in the taxable year of the U.S. holder in which or with which our taxable year ends. A subsequent distribution of amounts that were previously included in the gross income of U.S. holders should not be taxable as a dividend to those U.S. holders who made a QEF election. In the event we incur a net loss for a taxable year, such loss will not be available as a deduction to an electing U.S. holder, and may not be carried forward or back in computing our net capital gain or ordinary earnings in other taxable years. The tax basis of the shares of an electing U.S. holder generally will be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the QEF rules described above. In order to make (or maintain) a QEF election, the U.S. holder must annually complete and file IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form. However, we do not expect that we will prepare or provide to U.S. Holders a “PFIC annual information statement,” which would enable a U.S. Holder to make a QEF election.
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Alternatively, if a U.S. holder elects to “mark-to-market” its ordinary shares, the U.S. holder generally will include in its income any excess of the fair market value of our ordinary shares at the close of each taxable year over the holder’s adjusted basis in such ordinary shares. A U.S. holder generally will be allowed an ordinary deduction for the excess, if any, of the adjusted tax basis of the ordinary shares over the fair market value of the ordinary shares as of the close of the taxable year, or the amount of any net mark-to-market gains recognized for prior taxable years, whichever is less. A U.S. holder’s adjusted tax basis in the ordinary shares generally will be adjusted to reflect the amounts included or deducted under the mark-to-market election. Additionally, any gain on the actual sale or other disposition of the ordinary shares generally will be treated as ordinary income. Ordinary loss treatment also will apply to any loss recognized on the actual sale or other disposition of ordinary shares to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included with respect to such ordinary shares. If a U.S. holder makes a valid mark-to-market election with respect to our ordinary shares for the first taxable year of the U.S. holder in which the U.S. holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect of its ordinary shares. A mark-to-market election applies to the tax year for which the election is made and to each subsequent year, unless our ordinary shares cease to be marketable, as specifically defined, or the IRS consents to revocation of the election. No view is expressed regarding whether our ordinary shares are marketable for these purposes or whether the election will be available. However, because a mark-to-market election likely cannot be made for any lower-tier PFICs, if we are a PFIC, a U.S. holder will generally continue to be subject to the PFIC rules discussed above with respect to such holder’s indirect interest in any investments that we hold that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. As a result, it is possible that any mark-to-market election will be of limited benefit.
If a U.S. holder makes either the QEF election or the mark-to-market election, distributions and gain will not be recognized ratably over the U.S. holder’s holding period or be subject to an interest charge as described above. Further, the denial of basis step-up at death described above will not apply. If a U.S. holder makes the QEF election, gain on the sale of the ordinary shares will be characterized as capital gain. However, U.S. holders making one of these two elections may experience current income recognition, even if we do not distribute any cash. The elections must be made with the U.S. holder’s federal income tax return for the year of election, filed by the due date of the return (as it may be extended) or, under certain circumstances provided in applicable Treasury Regulations, subsequent to that date.
The foregoing discussion relating to the QEF election and mark-to-market elections assumes that a U.S. holder makes the applicable election with respect to the first year in which Nova qualifies as a PFIC. If the election is not made for the first year in which Nova qualifies as a PFIC, the procedures for making the election and the consequences of election will be different.
SPECIFIC RULES AND REQUIREMENTS APPLY TO BOTH THE QEF ELECTION AND THE MARK-TO-MARKET ELECTION, AND YOU ARE URGED TO CONSULT YOUR TAX ADVISOR CONCERNING OUR PFIC STATUS AND THE VARIOUS ELECTIONS YOU CAN MAKE.
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Medicare 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 such 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. A U.S. holder’s “net investment income” generally may include its dividend income and its net gains from the disposition of shares, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a U.S. holder that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the shares and the interaction of these rules with the rules applicable to income included as a result of the QEF election.
United States Information Reporting and Backup Withholding
In general, U.S. holders may be subject to certain information reporting requirements under the Code relating to their purchase and/or ownership of stock of a foreign corporation such as the Company. Failure to comply with these information reporting requirements may result in substantial penalties.
Specifically, certain U.S. Holders holding specified foreign financial assets, including our ordinary shares, with an aggregate value in excess of the applicable U.S. dollar threshold, are subject to certain exceptions, required to report information relating to our Ordinary Shares by attaching a complete IRS Form 8938, Statement of Specified Foreign Financial Assets, to their tax returns, for each year in which they hold our ordinary shares. U.S. Holders are urged to consult their own tax advisors regarding information reporting requirements relating to the ownership of our Ordinary Shares.
In addition, and as discussed in the section of this annual report entitled “U.S. Taxation – Passive Foreign Investment Companies”, if a corporation is classified as a PFIC, a U.S. person that is a direct or indirect holder generally will be required to file an informational return annually on IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form, to report its ownership interest in such entity, unless otherwise provided by the IRS.
Dividend payments and proceeds from the sale or disposal of ordinary shares may be subject to information reporting to the IRS and possible U.S. federal backup withholding. Certain holders (including, among others, corporations) generally are not subject to information reporting and backup withholding. A U.S. holder generally will be subject to backup withholding if such holder is not otherwise exempt and such holder:
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fails to furnish its taxpayer identification number, or TIN, which, for an individual, is ordinarily his or her social security number;
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furnishes an incorrect TIN;
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is notified by the IRS that it is subject to backup withholding because it has previously failed to properly report payments of interest or dividends; or
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fails to certify, under penalties of perjury, that it has furnished a correct TIN and that the IRS has not notified the U.S. holder that it is subject to backup withholding.
Any U.S. holder who is required to establish exempt status generally must file IRS Form W-9 (“Request for Taxpayer Identification Number and Certification”).
Backup withholding is not an additional tax and may be claimed as a refund or a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS.
10.FDividends and Paying Agents
Not applicable.
10.GStatements by Experts
Not applicable.
10.HDocuments on Display
As a foreign private issuer, are exempt from the rules 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. Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. In addition, we are not be required under the Exchange Act to file annual or other reports and consolidated financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Instead, we must file with the SEC, within 120 days after the end of each fiscal year, or such other applicable time as required by the SEC, an annual report on Form 20-F containing consolidated financial statements audited by an independent registered public accounting firm. We also intend to furnish certain other material information to the SEC under cover of Form 6-K.
We maintain a corporate website at www.novami.com. Information contained on, or that can be accessed through, our website does not constitute a part of this annual report on Form 20-F. We have included our website address in this annual report on Form 20-F solely as an inactive textual reference.
10.ISubsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market risk in the area of foreign exchange rates, as described below.
The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments that could expose it to significant market risk.
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Impact of Currency Fluctuation
Because our results are reported in U.S. Dollars, changes in the rate of exchange between the Dollar and local currencies in those countries in which we operate (primarily the NIS) will affect the results of our operations. The dollar cost of our operations in countries other than the U.S., is negatively influenced by revaluation of the U.S. dollar against other currencies. During 2020, the value of the U.S. dollar devaluated against the NIS by approximately 7.0% As of December 31, 2020, the majority of our net monetary assets were denominated in dollars and the remainder was denominated mainly in NIS. Net monetary assets that are not denominated in dollars or dollar-linked NIS were affected by the currency fluctuations in 2020 and are expected to continue to be affected by such currency fluctuations in 2021. As of December 31 ,2020 the Company recorded a NIS and Israel CPI linked lease liability, under the implementation of ASC 842 in the amount of $23 million (including exchange rate differences of $1.9 million).
In 2019, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $108 million with settlement dates through 2019-2020, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $108 million. In accordance with ASC 815-10, we recorded in 2019 an increase of approximately $0.2 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as of December 31, 2019, with all other variables held constant, would decrease the fair value of our net liabilities denominated in NIS, held at December 31, 2019, by approximately $1.2 million.
In 2020, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $100 million with settlement dates through 2020-2021, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $100 million. In accordance with ASC 815-10, we recorded in 2020 an increase of approximately $0.6 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as of December 31, 2020, with all other variables held constant, would decrease the fair value of our net liabilities denominated in NIS, held at December 31, 2020, by approximately $1.9 million.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modification to the Rights of Security Holders and Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
(a) Our management, including our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the foregoing, our chief executive officer and chief financial officer have concluded that, as of December 31, 2020, our disclosure controls and procedures were effective.
(b)Our management, under the supervision of our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over our financial reporting. The Company’s internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, means 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. Internal control over financial reporting includes policies and procedures that:
—pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;
—provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in 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 the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of 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.
Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2020, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting was effective.
98
(c)Kost Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & Young, has issued an attestation report on the effectiveness of our internal control over financial reporting, as stated in their report included herein. See “Report of Independent Registered Public Accounting Firm” on page F-3.
(d)There were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the period covered by this annual report that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that our audit committee includes one audit committee financial expert, as defined by Item 16A of Form 20-F. Our board of directors has determined that Ms. Dafna Gruber is an “audit committee financial expert” as defined by the SEC rules as well as an independent director as such term is defined by Rule 5605(a)(2) of the Nasdaq Stock Market and has the requisite financial experience as defined by the Nasdaq rules.
Item 16B. Code of Ethics
The Company has adopted a written code of conduct that applies to all Company employees, including the Company’s directors, principal executive officer, principal financial officer and principal accounting officer.
You may review our code of conduct on our website: https://www.novami.com/, under “Investors/Corporate Governance”.
Item 16C. Principal Accountant Fees and Services
During the last three fiscal years, Kost Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & Young Global (“Kost Forer Gabbay & Kasierer”) has acted as our registered public accounting firm and independent auditors. The following table provides information regarding fees paid by us to Kost Forer Gabbay & Kasierer for all services, including audit services, for the years ended December 31, 2019 and 2020:
|
2019 |
2020 | |||||||
|
| ||||||||
|
Audit Fees |
$ |
350,000 |
$ |
586,000 | ||||
|
Tax Fees |
$ |
70,000 |
$ |
89,000 | ||||
|
Other Fees |
$ |
84,000 |
$ |
125,000 | ||||
|
Total |
$ |
504,000 |
$ |
800,000 | ||||
“Audit fees” are fees associated with the annual audit of the Company consolidated financial statements and services that generally the independent accountant provides, such as consents and assistance with and review of documents filed with the SEC as well as certain fees related to the audit in connection with our issuance of convertible senior notes in October 2020. The audit fee also includes consultations on various accounting issues, performance of local statutory audits, fees associated with the audit of management assessment of internal control over financial reporting, annual tax returns and audit of reports to IIA. “Tax Fees” are fees related to ad hoc tax consulting services and opinions.
99
“Other Fees” include services related to SEC regulation consulting, organizational consultation, and due diligence services.
Our audit committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain services. Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, all audit, audit related and tax services must be specifically approved by the audit committee and certain other non-audit, non-audit related and non-tax services may be approved without consideration of specific case-by-case provided certain terms and procedures are met. The Company’s audit committee approved all of the services provided by Kost Forer Gabbay & Kasierer in fiscal years 2020 and 2019.
Item 16D. Exemptions from the Listing Standards for Audit Committees
The Company has not obtained any exemption from applicable audit committee listing standards.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliates Purchasers
In November 2018, we announced a $25 million repurchase program of our ordinary shares. Through December 31, 2020, we spent an aggregate of $14.5 million to repurchase 556,603 ordinary shares under our share repurchase program. The following table provides information regarding our repurchases of our ordinary shares for each month included in the period covered by this annual report on Form 20-F:
|
Period |
(a) Total Number of Ordinary Shares Purchased |
(b) Average Price Paid per Ordinary Share |
(c) Total Number of Ordinary Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) | ||||||||||||
|
March 2020 |
440 |
32.04 |
477,187 |
$ |
13.03 | |||||||||||
|
April 2020 |
79,416 |
31.92 |
556,603 |
$ |
10.49 | |||||||||||
On October 11, 2020, as part of the authorization of the Senior Convertible Notes Offering, the Company’s board of directors approved and authorized a share repurchase for an aggregate amount of up to $ 20 million (see note 16) in connection of which, on October 13, 2020, the Company repurchased 170,910 ordinary shares for an aggregate amount of $10 million.
Item 16F. Change In Registrant’s Certifying Accountant
None.
100
Item 16G. Corporate Governance
There are no significant ways in which the Company’s corporate governance practices differ from those followed by domestic companies listed on the Nasdaq Global Select Market.
Item 16H. Mine Safety Disclosure
Not applicable.
PART III
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
See pages F-1 through F-[30].
Item 19. Exhibits
See Exhibit Index.
101
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020
Contents
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Page | |
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F-3 - F-5 | |
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F-6 | |
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F-7 | |
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F-8 | |
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F-9 | |
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F-10 | |
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F-11 - F-34 |
F - 2
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|
Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A, Tel-Aviv 6492102, Israel |
Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
NOVA MEASURING INSTRUMENTS LTD.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Nova Measuring Instruments Ltd. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, 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 1, 2021, 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 Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters 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 matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
F - 3
|
Valuation of excess and obsolete inventory reserve | ||
|
| ||
|
Description of the Matter |
The Company’s inventories totaled $61.7 million as of December 31, 2020. As described in Note 2h to the consolidated financial statements, the Company assesses the value of inventories, including raw materials, service inventory, work-in-process and finished goods, in each reporting period, and values its inventories at the lower of cost or net realizable value. Reserves for potential excess and obsolete inventory are made based on management's analysis of inventory levels, future sales forecasts, the expected consumption of service spare parts, and market conditions.
Auditing management's estimates for valuation of inventories involved subjective auditor judgment due to the significant assumptions made by management about the future salability of the inventories. These assumptions include the assessment, by inventory category (finished goods, work-in-process, service inventory and raw materials), of future usage and market demand for the Company's products. | |
|
| ||
|
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, including management's assessment of the underlying assumptions and data.
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 cost of on-hand inventories to historical sales and evaluated adjustments to sales forecasts for specific product considerations, such as technological changes or alternative uses. 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. | |
|
| ||
|
Accounting for the Issuance of Convertible Senior Notes | ||
|
| ||
|
Description of the Matter |
As explained in Note 16 to the consolidated financial statements, in October 2020, the Company issued $200 million of 0% Convertible Senior Notes due 2025 (the "Notes"). In accounting for the issuance of the Notes, management allocated the total proceeds into liability and equity components. The carrying amount of the liability component was calculated by estimating the fair value of the Notes if there were no associated convertible features. The carrying amount of the equity component, representing the conversion option was determined by deducting the fair value of the liability component from the principal amount of the Notes. The valuation model used in determining the fair value of the liability component for the Notes includes assumptions subject to management's judgment, including the synthetic credit rating.
Auditing management’s evaluation of the transaction was complex and required a high degree of auditor judgment due to the inherent complexity in assessing the accounting for the Notes. This required an assessment of the valuation of the fair value of the liability component of the Notes, which included evaluation of assumptions, such as the Company’s synthetic credit rating, subject to management's judgment in determining the borrowing rate. | |
|
| ||
|
How We Addressed the Matter in Our Audit |
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls in respect of the Company’s Notes, including controls over the initial recognition and measurement of the Notes and recording of the associated liability and equity components.
To test the initial accounting for the Notes, our procedures included, among others, inspection of the underlying agreements and testing management’s evaluation and application of the relevant accounting guidance. We also involved our valuation specialists to evaluate the Company’s determination of the fair value of the liability component of the Notes. We tested the appropriateness of the methodology, evaluated the reasonableness of the underlying assumptions used to determine the borrowing rate, such as the Company’s synthetic credit rating, and performed an independent calculation of the carrying amounts attributable to the liability and equity components. Additionally, we tested the source information underlying the valuation assumptions and inputs used to determine the fair value and the mathematical accuracy of the calculation. We also evaluated the Company’s disclosures regarding the issuance of the Notes included in Note 16. |
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company's auditor since 2015.
Tel-Aviv, Israel
March 1, 2021
F - 4
|
|
Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A, Tel-Aviv 6492102, Israel |
Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of NOVA MEASURING INSTRUMENTS LTD.
Opinion on Internal Control Over Financial Reporting
We have audited Nova Measuring Instruments Ltd. internal control over financial reporting as of December 31, 2020, 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, Nova Measuring Instruments Ltd. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020, and 2019, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes of the Company, and our report dated March 1, 2021, expressed an unqualified opinion thereon.
Basis for 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 Annual 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/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company’s auditor since 2015.
Tel-Aviv, Israel
March 1, 2021
F - 5
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
|
|
|
As of December 31, |
| |||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
| ||
|
ASSETS |
|
|
|
|
|
| ||
|
Current assets |
|
|
|
|
|
| ||
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Short-term interest-bearing bank deposits |
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net of allowance of $ |
|
|
|
|
|
|
|
|
|
Inventories (Note 3) |
|
|
|
|
|
|
|
|
|
Other current assets (Note 4) |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current assets |
|
|
|
|
|
|
|
|
|
Interest-bearing bank deposits |
|
|
|
|
|
|
|
|
|
Restricted interest-bearing bank deposits |
|
|
|
|
|
|
|
|
|
Deferred tax assets (Note 11) |
|
|
|
|
|
|
|
|
|
Other long-term assets |
|
|
|
|
|
|
|
|
|
Severance pay funds (Note 8) |
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets (Note 14) |
|
|
|
|
|
|
|
|
|
Property and equipment, net (Note 5) |
|
|
|
|
|
|
|
|
|
Intangible assets, net (Note 6) |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
Trade accounts payable |
|
$ |
|
|
|
$ |
|
|
|
Deferred revenues |
|
|
|
|
|
|
|
|
|
Operating lease current liabilities (Note 14) |
|
|
|
|
|
|
|
|
|
Other current liabilities (Note 7) |
|
|
|
|
|
|
|
|
|
Total current liabilities |
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Non-Current liabilities |
|
|
|
|
|
|
|
|
|
Convertible senior notes, net (Note 16) |
|
| ||||||
|
Accrued severance pay (Note 8) |
|
|
|
|
|
|
|
|
|
Operating lease long-term liabilities (Note 14) |
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY (Note 10) |
|
|
|
|
|
|
|
|
|
Ordinary shares, NIS |
|
|
|
|
|
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|
|
Additional paid-in capital |
|
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|
|
|
|
|
Accumulated other comprehensive income |
|
|
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|
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|
| |
|
Retained earnings |
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share data)
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
|
|
2 0 1 8 |
| |||
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|
|
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| |||
|
Revenues: |
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|
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|
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|
|
|
| |||
|
Products |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
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|
Cost of revenues: |
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|
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|
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|
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Products |
|
|
|
|
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|
|
|
|
|
|
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Gross profit |
|
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|
Operating expenses: |
|
|
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|
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|
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|
|
|
|
|
|
Research and development, net (Note 2m) |
|
|
|
|
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|
|
|
|
|
|
|
|
Sales and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets (Note 6) |
|
|
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|
|
|
|
|
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|
|
|
|
Total operating expenses |
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing income, net (Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
$ |
|
| |
|
|
|
|
|
|
|
|
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|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
|
|
|
$ |
|
|
|
$ |
|
| |
|
Diluted |
$ |
|
|
|
$ |
|
|
|
$ |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
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|
|
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|
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|
|
Diluted |
|
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|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
|
|
2 0 1 8 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) ("OCI") (Note 13) related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) from cash flow hedges |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Less: reclassification adjustment for net gain (loss) included in net income |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Total comprehensive income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands, except share amounts)
|
|
|
Ordinary Shares |
|
|
Additional Paid-in Capital |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
Retained Earnings |
|
|
Total Shareholders' Equity |
| |||||||||
|
|
|
Number |
|
|
Amount | |||||||||||||||||||
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2018 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Cumulative effect from adoption of a new accounting standard – ASC 606 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Issuance of shares upon exercise of options |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Issuance of shares upon vesting of RSU |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Share based compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Share repurchase at cost |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares upon exercise of options |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Issuance of shares upon vesting of RSU |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Share based compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Share repurchase at cost |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
Issuance of shares upon exercise of options |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Issuance of shares upon vesting of RSU |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Share based compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Equity component of convertible senior notes, net of issuance costs and tax |
- |
- |
|
- |
- |
| ||||||||||||||||||
|
Share repurchase at cost |
( |
) |
( |
) |
( |
) |
- |
- |
( |
) | ||||||||||||||
|
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
|
|
2 0 1 8 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount and issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect of exchange rate fluctuation |
( |
) |
( |
) |
| |||||||
|
Changes in assets and liabilities: |
|
| ||||||||||
|
Trade accounts receivables, net |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Inventories |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Other current and long-term assets |
|
|
|
|
|
( |
) |
|
|
( |
) | |
|
Deferred tax assets, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Operating lease right-of-use assets |
|
|
|
|
|
|
|
|
|
|
| |
|
Trade accounts payables |
|
|
|
|
|
|
|
|
|
| ||
|
Deferred revenues |
|
( |
) |
( |
) | |||||||
|
Operating lease liabilities |
|
|
| |||||||||
|
Other current and long-term liabilities |
|
|
( |
) | ||||||||
|
Accrued severance pay, net |
|
|
| |||||||||
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investment activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in short-term and long-term interest-bearing bank deposits |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Purchase of property and equipment |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of convertible senior notes, net of issuance costs |
|
|
| |||||||||
|
Purchases of treasury shares |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from exercise of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
| ||||||||||||
|
Effect of exchange rate fluctuations on cash and cash equivalents |
|
|
( |
) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Cash and cash equivalents - beginning of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of year |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating right-of-use assets recognized with corresponding operating lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 1 - GENERAL
Business Description:
Nova Measuring Instruments Ltd. (“Nova” or the “Parent Company”) was incorporated and commenced operations in 1993 in the design, development and production of process control systems, used in the manufacturing of semiconductors. Nova has wholly owned subsidiaries in the United States of America (the “U.S.”), Japan, Taiwan, Korea and Germany (together defined as the “Company”).
The Company continues research and development for the next generation of its products and additional applications for such products. The Company operates in one operating segment.
On April 2, 2015, the Company completed the acquisition of
The ordinary shares of the Company are traded on the NASDAQ Global Market since April 2000 and on the Tel-Aviv Stock Exchange since June 2002.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America.
The following is a summary of the significant accounting policies, which were applied in the preparation of these financial statements, on a consistent basis:
A.Principles of Consolidation and Basis of Presentation
The Company’s consolidated financial statements include the financial statements of Nova Measuring Instruments Ltd. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
B.Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The Company's management evaluates its estimates on an ongoing basis, including those related to, but not limited to income taxes and tax uncertainties, collectability of trade accounts receivable, inventory accruals, fair value and useful lives of intangible assets, lease discount rate, lease period, convertible senior notes borrowing rate and revenue recognition. These estimates are based on management's knowledge about current events and expectations about actions the Company may undertake in the future. Actual results could differ from those estimates.
The novel coronavirus (“COVID-19”) pandemic has created, and may continue to create, significant uncertainty in macroeconomic conditions, and the extent of its impact on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and the impact on the Company’s customers and its sales cycles. The Company considered the impact of COVID-19 on the estimates and assumptions and determined that there were no material adverse impacts on the consolidated financial statements for the period ended December 31, 2020. As events continue to evolve and additional information becomes available, the Company’s estimates and assumptions may change materially in future periods.
F - 11
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
C.Financial Statements in U.S. Dollars
The currency of the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the U.S. dollar (the “dollar”). Accordingly, the Company uses the dollar as its functional and reporting currency. Certain of the dollar amounts in the financial statements may represent the dollar equivalent of other currencies, including the New Israeli Shekel (“NIS”). Transactions and balances denominated in dollars are presented at their dollar amounts. Non-dollar transactions and balances are re-measured into dollars in accordance with the principles set forth in ASC 830, “Foreign Currency Translation”.
All transaction gains and losses of the re-measured monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate.
D.Cash and Cash Equivalents
Cash and cash equivalents represent short-term highly liquid investments (mainly interest-bearing deposits) with maturity dates not exceeding three months from the date of deposit.
E.Short Term Bank Deposit
Short-term bank deposits consist of bank deposits with original maturities of more than three months and up to twelve months.
F.Trade accounts receivables
Trade accounts receivables are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. The Company makes estimates of expected credit losses for based upon its assessment of various factors, including historical experience, the age of the trade receivable balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect its ability to collect from customers. The Company has adopted ASC 326 as of January 1, 2020. Prior to the adoption of ASC 326, the Company evaluated its outstanding accounts receivable and established an allowance for doubtful accounts according to specific identification basis, based on information available on the relevant customer credit condition, current aging, historical experience and based on Company policy.
G.Business Combination
The Company accounts for business combination in accordance with ASC No, 805, “Business Combination” (ASC 805). ASC 805 requires recognition of assets acquired and liabilities assumed at the acquisition date, measured at their fair values as of that date. Any access of the fair value of net assets acquired over purchased price and any subsequent changes in estimated contingencies are to be recorded in the consolidated statements of operations.
H.Inventories
Inventories are stated at the lower of cost or net realizable value. Inventory write-downs are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories, discontinued products, and for market prices lower than cost, if any. The Company periodically evaluates the quantities on hand relative to historical and projected sales volume (which is determined based on an assumption of future demand and market conditions), the age of the inventory and the expected consumption of service spare parts. At the point of the loss recognition, a new lower cost basis for that inventory is established. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.
Inventory includes costs of products delivered to customers and not recognized as cost of sales, where revenues in the related arrangements were not recognized.
To support the Company’s service operations, the Company maintains service spare parts inventory and reduce the net carrying value of this inventory over the service life.
F - 12
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Cost is determined as follows:
•
Raw materials – based on the moving average cost method.
•
Service inventory, work in process and finished goods - based on actual production cost basis (materials, labor and indirect manufacturing costs).
I.Property and Equipment
Property and equipment are presented at cost, net of accumulated depreciation. Annual depreciation is calculated based on the straight-line method over the estimated useful lives of the related assets. Estimated useful life is as follows:
|
Years | ||
|
| ||
|
Electronic equipment |
| |
|
Office furniture and equipment |
| |
|
Leasehold improvements |
Over the shorter of the term of the lease (including its extension periods) or the useful life of the asset |
Depreciation methods, useful lives and residual values are reviewed at the end each reporting year and adjusted if appropriate.
J.Goodwill and Intangible Assets
Goodwill and other purchased intangible assets have been recorded as a result of the acquisition of ReVera. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired, and related liabilities.
Goodwill is not amortized, but rather is subject to an impairment test, in accordance with ASC 350, “Intangibles – Goodwill and Other”, at least annually (in the fourth quarter), or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Company has an option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value prior to performing the quantitative goodwill impairment test. The Company operates in
Following the adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment", any excess of the carrying value of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to the fair value of the reporting unit.
Intangible assets with finite life (refer to note 2T for impairment assessment of Intangible assets with finite life) are amortized over their useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used, or, if that pattern cannot be reliably determined, using a straight-line amortization method.
|
Weighted Average Useful Life (Years) | |||
|
Technology |
| ||
|
Customer relationships |
| ||
|
IPR&D |
(*) | ||
(*)
F - 13
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
IPR&D is tested for impairment annually or more frequently when indicators of impairment exist. The Company first assesses qualitative factors to determine if it is more likely than not that the IPR&D is impaired and whether it is necessary to perform a quantitative impairment test. The qualitative assessment considers various factors, including changes in demand, the abandonment of the IPR&D or significant economic slowdowns in the semiconductor industry and macroeconomic environment. If adverse qualitative trends are identified that could negatively impact the fair value of the asset, then quantitative impairment test is performed to compare the carrying value of the asset to its undiscounted expected future cash flows.
If this test indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using discounted expected future cash flows utilizing an appropriate discount rate.
K.Accrued Warranty Costs
Accrued warranty costs are calculated with respect to the warranty period on the Company’s products and are based on the Company’s prior experience and in accordance with management’s estimate. The estimated future warranty obligations are affected by the warranty periods, install base, labor and other related costs incurred in correcting a product failure.
L.Revenue Recognition
Revenue Recognition Policy
The Company enters into revenue arrangements that include products and services which are distinct and accounted for as separate performance obligations. The Company determines whether promises are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the Company's commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract.
The company derives revenue from sales of advanced process control systems, spare parts, labor hours (mainly related to installation) and service contracts.
Revenues derived from sales of advanced process control systems, spare parts and labor hours are recognized at a point in time, when control of the promised goods or services is transferred to the customers, upon fulfillment of the contractual terms (typically upon shipment of the systems and spare parts or when the service is completed for labor hours).
Revenues derived from service contracts, are recognized ratably over time in accordance with the term of the contract since the Company has a stand-ready obligation to provide the service. Such contracts generally include a fixed fee.
Revenues from sales which were not yet determined to be final sales due to certain acceptance provisions are deferred.
Significant Judgments - Contracts with Multiple Performance Obligations
Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative Standalone Selling Price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
F - 14
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Remaining Performance Obligations
Remaining performance obligations (RPOs) represent contracted revenues that had not yet been recognized and include deferred revenues and invoices that have been issued to customers but were uncollected and have not been recognized as revenues. As of December 31, 2020, the aggregate amount of the RPOs was $
Contract Balances
Contract balances are presented separately on the consolidated balance sheets.
Revenues recognized during 2020, 2019 and 2018 from deferred revenues amounts included in current liabilities at the beginning of the period amounted to $
In certain arrangements, the Company receives payment from a customer either before or after the performance obligation has been satisfied. The expected timing difference between the payment and satisfaction of performance obligations for the Company’s contracts is one year or less; therefore, the Company applies a practical expedient and does not consider the effects of the time value of money.
M.Research and Development
Research and development costs are charged to operations as incurred. Amounts received or receivable from the Government of Israel through the Israeli Innovation Authority (“IIA”, formerly known as the Office of the Chief Scientist) or from the European Community as participation in certain research and development programs are offset against research and development costs. The accrual for grants receivable is determined based on the terms of the programs, provided that the criteria for entitlement are expected to be met. Royalty expenses are determined based on actual revenues and presented in cost of revenues. Research and development grants recognized during the years ended December 31, 2020, 2019 and 2018 were $
N.Income Taxes
The Company accounts for income taxes utilizing the asset and liability method in accordance with ASC 740, “Income Taxes”. Current tax liabilities are recognized for the estimated taxes payable on tax returns for the current year. Deferred tax liabilities or assets are recognized for the estimated future tax effects attributable to temporary differences between the income tax bases of assets and liabilities and their reported amounts in the financial statements, and for tax loss carryforwards.
Measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax laws, and deferred tax assets are reduced, if necessary, by the amount of tax benefits, the realization of which is not considered more likely than not based on available evidence.
ASC 740-10 requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than
F - 15
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
O.Share-Based Compensation
The Company accounts for equity-based compensation using ASC 718 “Compensation - Stock Compensation,” which requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant-date fair value of those awards.
Share Options
Under ASC 718, the fair market value of each option grant is estimated on the date of grant using the “Black-Scholes option pricing” method with the following weighted-average assumptions:
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
|
|
2 0 1 8 |
| |||
|
Risk-free interest rate |
|
|
|
|
|
|
|
|
| |||
|
Expected term of options |
|
|
|
|
|
|
|
|
| |||
|
Expected volatility |
|
|
|
|
|
|
|
|
| |||
|
Expected dividend yield |
|
|
|
|
|
|
|
|
| |||
Expected volatility was calculated based on actual historical share price movements over a term that is equivalent to the expected term of granted options. The expected term of options granted is based on historical experience and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.
The Company recognizes compensation expenses for the value of awards granted, based on the accelerated method. The Company account for forfeitures as they occur.
P.Earnings per Share
Earnings per share are presented in accordance with ASC 260-10, “Earnings per Share”. Pursuant to which, basic earnings per share excludes the dilutive effects of convertible securities and is computed by dividing income (loss) available to common shareholders by the weighted-average number of ordinary shares outstanding for the period, net of treasury shares. Diluted earnings per share reflect the potential dilutive effect of options and RSUs. The number of potentially dilutive options and RSUs excluded from diluted earnings per share due to the anti-dilutive effect of out of the money options amounted to
Additionally,
Q.Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits, trade accounts receivable and foreign currency derivative contracts.
The majority of the Company’s cash and cash equivalents and bank deposits are invested in dollar instruments with major banks in Israel. Management believes that the financial institutions that hold the Company's investments are corporations with high credit standing. Accordingly, management believes that low credit risk exists with respect to these financial investments.
F - 16
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The trade accounts receivable of the Company are derived from sales to customers located primarily in Taiwan R.O.C., Korea, China and USA. The management of the Company performed risk assessment on an ongoing basis and believes it bears low risk.
The Company entered into options and forward contracts to hedge against the risk of overall changes in future cash flow from payments of payroll and related expenses as well as other expenses denominated in NIS. The derivative instruments hedge a portion of the Company's non-dollar currency exposure. Counterparty to the Company’s derivative instruments is major financial institution.
R.Fair Value Measurements
The fair values of the Company’s cash and cash equivalents, short-term interest-bearing bank deposits, trade accounts receivable, and accounts payable approximate their carrying amounts due to their short-term nature.
The Company follows the provisions of ASC No. 820, “Fair Value Measurement” (“ASC 820”), which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In determining a fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions that market participants would use in pricing an asset or liability, based on the best information available under given circumstances.
The hierarchy is broken down into three levels, based on the observability of inputs and assumptions, as follows:
Level 1 - Observable inputs obtained from independent sources, such as quoted prices for identical assets and liabilities in active markets.
Level 2 - Other inputs that are directly or indirectly observable in the market place.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The estimated fair values of the derivative instruments are determined based on market rates to settle the instruments. The fair value of the Company’s derivative contracts (including forwards and options) is determined using standard valuation models. The significant inputs used in these models are readily available in public markets or can be derived from observable market transactions and, therefore, the Company’s derivative contracts have been classified as Level 2.
Inputs used in these standard valuation models include the applicable spot, forward, and discount rates. The standard valuation model for the Company options contracts also includes implied volatility, which is specific to individual options and is based on rates quoted from a widely used third-party resource.
The Company’s cash and cash equivalents, Interest-bearing bank deposits and restricted interest-bearing bank deposits are classified within level 1. Derivative instruments and Convertible senior notes classified within Level 2 (see Note 13 and Note 16, respectively).
F - 17
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
S.Derivative Financial Instruments
ASC 815 requires the presentation of all derivatives as either assets or liabilities on the balance sheet and the measurement of those instruments at fair value.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected 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 and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. See Note 13 for disclosure of the derivative financial instruments in accordance with such pronouncements.
T.Impairment of Long-Lived Assets
Long-lived assets (tangible and intangible assets with finite life), held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets (or asset Group) may not be recoverable. In the event that the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment charge would be recognized, and the assets (or asset Group) would be written down to their estimated fair values. During the years 2020, 2019 and 2018, no impairment losses have been identified.
U.Leases
Under ASC 842, a contract is or contains a lease when the Company has the right to control the use of an identified asset for a period of time. The Company determines if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to, and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for the Company’s use. On the commencement date leases are evaluated for classification and assets and liabilities are recognized based on the present value of lease payments over the lease term.
The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised. The right-of-use (“ROU”) asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments and any lease incentives. Costs incurred for common area maintenance, real estate taxes, and insurance are not included in the lease liability and are recognized as they are incurred.
The Company’s leases include office buildings for its facilities and car leases in Israel, which are all classified as operating leases. Certain lease agreements include rental payments that are adjusted periodically for the consumer price index (“CPI”). The ROU and lease liability were calculated using the CPI as of the adoption date and will not be subsequently adjusted. Certain leases include renewal options that are under the Company’s sole discretion. The renewal options were included in the ROU and liability calculation if it was reasonably assured that the Company will exercise the option.
As the Company’s lease arrangements do not provide an implicit rate, the Company uses its incremental estimated borrowing rate at lease commencement to measure ROU assets and lease liabilities. Operating lease expense is generally recognized on a straight-line basis over the lease term. For leases with a term of one year or less, the Company elected not to record the ROU asset or liability.
F - 18
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
V.Convertible senior notes
The Company accounts for its convertible senior notes in accordance with ASC 470-20 "Debt with Conversion and Other Options". Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The liability component at issuance is recognized at fair value, based on the fair value of a similar instrument of similar credit rating and maturity that does not have a conversion feature. The equity component is based on the excess of the principal amount of the convertible senior notes over the fair value of the liability component and is recorded in additional paid-in capital. The equity component, net of issuance costs and deferred tax effects is presented within additional paid-in-capital and is not remeasured as long as it continues to meet the conditions for equity classification. The difference between the principal amount and the liability component represents a debt discount that is amortized to financial expense over the respective terms of the Notes using an effective interest rate method. The Company allocated the total issuance costs incurred to the liability and equity components of the convertible senior notes based on their relative values.
Issuance costs attributable to the liability and equity components were $
W.New Accounting Pronouncements
Recently adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued amendment ASU 2016-13 “Financial Instruments – Credit Losses” (ASC 326). This update requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.
The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances.
On January 1, 2020, the Company adopted ASU 2016-13 , using the modified retrospective transition method. The cumulative effect adjustment from adoption was immaterial to our condensed consolidated financial statements. We continue to monitor the financial implications of the COVID-19 pandemic on expected credit losses.
F - 19
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
In May 2019, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. The Company adopted ASU 2017-04 as of January 1, 2020 with no material impact on its consolidated financial statements.
Recently issued accounting pronouncements not yet adopted:
In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This guidance will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is not permitted before fiscal years beginning after December 15, 2020. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements.
X.Certain prior period amounts have been reclassified to conform to the current period presentation.
NOTE 3 - INVENTORIES
A.Composition:
|
|
|
As of December 31, |
| |||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
| ||
|
|
|
|
|
|
|
| ||
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
Service inventory |
|
| ||||||
|
Work in process |
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
B.In the years ended December 31, 2020, 2019 and 2018, the Company wrote down inventories in a total amount of $
NOTE 4 - OTHER CURRENT ASSETS
|
As of December 31, | ||||||||
|
2 0 2 0 |
2 0 1 9 | |||||||
|
Governmental institutions |
$ |
|
$ |
| ||||
|
Prepaid expenses |
|
| ||||||
|
Other |
|
| ||||||
|
|
$ |
|
$ |
| ||||
F - 20
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 5 - PROPERTY AND EQUIPMENT, NET
|
|
|
As of December 31, |
| |||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
| ||
|
Cost: |
|
|
|
|
|
| ||
|
Electronic equipment |
|
$ |
|
|
|
$ |
|
|
|
Office furniture and equipment |
|
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation: |
|
|
|
|
|
|
|
|
|
Electronic equipment |
|
$ |
|
|
|
$ |
|
|
|
Office furniture and equipment |
|
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
$ |
|
|
|
$ |
|
|
Depreciation expenses amounted to $
NOTE 6 - INTANGIBLE ASSETS
Intangible assets originated from the acquisition of ReVera on April 2, 2015. The following is a summary of intangible assets as of December 31, 2020 and 2019:
|
|
|
As of December 31, |
| |||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
| ||
|
Original amount: |
|
|
|
|
|
| ||
|
Technology |
|
$ |
|
|
|
$ |
|
|
|
Customer relationships |
|
|
|
|
|
|
|
|
|
IPR&D |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
Technology |
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
|
|
|
|
|
|
|
IPR&D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
$ |
|
|
|
$ |
|
|
Amortization expenses amounted are as follows:
|
Year ended December 31, | ||||||||||||
|
2 0 2 0 |
2 0 1 9 |
2 0 1 8 | ||||||||||
|
| ||||||||||||
|
Technology |
$ |
|
$ |
|
$ |
| ||||||
|
Customer relationships |
|
|
| |||||||||
|
$ |
|
$ |
|
$ |
| |||||||
F - 21
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 6 - INTANGIBLE ASSETS (Cont.)
Annual amortization expenses (excluding IPR&D) are expected as follows:
|
Year ending December 31, | ||||
|
2021 |
$ |
| ||
|
2022 |
| |||
|
2023 |
| |||
|
2024 |
| |||
|
$ |
| |||
NOTE 7 - OTHER CURRENT LIABILITIES
A.Consists of:
|
|
|
As of December 31, |
| |||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
| ||
|
|
|
|
|
|
|
| ||
|
Accrued salaries and fringe benefits |
|
$ |
|
|
|
$ |
|
|
|
Accrued warranty costs (See B below) |
|
|
|
|
|
|
|
|
|
Governmental institutions |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
B.Accrued Warranty Costs:
The Company provides standard warranty coverage on its systems. Parts and labor are covered under the terms of the warranty agreement. The Company accounts for the estimated warranty cost as a charge to costs of revenues when revenue is recognized.
Accrued warranty costs presented in:
|
As of December 31, | ||||||||
|
2 0 2 0 |
2 0 1 9 | |||||||
|
| ||||||||
|
Other current liabilities |
$ |
|
$ |
| ||||
|
Other long-term liability |
|
| ||||||
|
$ |
|
$ |
| |||||
F - 22
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 7 - OTHER CURRENT LIABILITIES (Cont.)
The following table provides the changes in the product warranty accrual for the fiscal years ended December 31, 2020 and 2019:
|
|
|
As of December 31, |
| |||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
| ||
|
|
|
|
|
|
|
| ||
|
Balance as of beginning of year |
|
$ |
|
|
|
$ |
|
|
|
Services provided under warranty |
|
|
( |
) |
|
|
( |
) |
|
Changes in provision |
|
|
|
|
|
|
|
|
|
Balance as of end of year |
|
$ |
|
|
|
$ |
|
|
NOTE 8 - LIABILITY FOR EMPLOYEE SEVERANCE PAY, NET
Israeli law and labor agreements determine the obligations of the Company to make severance payments to dismissed employees and to employees leaving employment under certain other circumstances. The obligation for severance pay benefits, as determined by Israeli law, is based upon length of service and the employee’s most recent salary. The liability is partially covered through insurance policies purchased by the Company and deposits in a severance fund.
The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel's Severance Pay Law, 1963 or labor agreements.
Since July 2008, the Company's agreements with new Israeli employees are under Section 14 of the Israeli Severance Pay Law, 1963. The Company's contributions for severance pay have replaced its severance obligation.
Upon contribution of the full amount of the employee's monthly salary for each year of service, no additional calculations are conducted between the parties regarding the matter of severance pay and no additional payments are made by the Company to the employee.
Labor agreements in Taiwan determine the obligations of the Company to make severance payments to dismissed employees and to employees leaving employment under certain other circumstances. The obligation for severance pay benefits is based upon length of service and the employee’s average salary.
Severance pay expenses for the years ended December 31, 2020, 2019 and 2018, amounted to $
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company is obligated under certain agreements with its suppliers to purchase specified items of inventory which are expected to be utilized during the years 2021-2023. As of December 31, 2020, non-cancelable purchase obligations were approximately $
NOTE 10 - SHAREHOLDERS’ EQUITY
A.Rights of Shares:
Holders of ordinary shares are entitled to participate equally in the payment of cash dividends and bonus shares (stock dividends) and, in the event of the liquidation of the Company, in the distribution of assets after satisfaction of liabilities to creditors. Each ordinary share is entitled to one vote on all matters to be voted on by shareholders.
B.Share Repurchase:
On November 1, 2018, the Company announced $
On October 11, 2020, as part of the authorization of the Senior Convertible Notes Offering (see note 16), the Company’s board of directors approved and authorized a share repurchase for an aggregate amount of up to $
All treasury shares have been canceled as of the end of each respective year.
C.Equity Based Incentive Plans:
The Company’s Board of directors approves, from time to time, equity-based incentive plans, the last of which was approved in August 2017. Equity-based incentive plans include stock options, restricted share units and restricted stock awards to employees, officers and directors.
F - 23
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 10 - SHAREHOLDERS’ EQUITY (Cont.)
Share-based compensation
The following table summarizes the effects of share-based compensation resulting from the application of ASC 718 included in the Statements of Operations as follows:
|
|
Year ended December 31, |
| ||||||||||
|
|
2 0 2 0 |
|
2 0 1 9 |
|
2 0 1 8 |
| ||||||
|
Cost of Revenues: |
|
|
|
|
|
| ||||||
|
Product |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
As of December 31, 2020, there was $
Shares Options
Share options vest over
The weighted average fair value (in dollars) of the options granted during 2020, 2019 and 2018, according to Black-Scholes option-pricing model, amounted to $
Summary of the status of the Company’s share option plans as of December 31, 2020, as well as changes during the year then ended, is presented below:
|
|
|
2 0 2 0 |
| |||||
|
|
|
Share Options |
|
|
Weighted Average Exercise Price |
| ||
|
Outstanding - beginning of year |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
( |
) |
|
|
|
|
|
Expired and forfeited |
|
|
( |
) |
|
|
|
|
|
Outstanding - year end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year end |
|
|
|
|
|
|
|
|
The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's closing share market price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of the fiscal year. This amount changes based on the fair market value of the Company's shares.
The total intrinsic value of options outstanding as of December 31, 2020 and 2019 was $
F - 24
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 10 - SHAREHOLDERS’ EQUITY (Cont.)
The following table summarizes information about share options outstanding as of December 31, 2020:
|
Range of Exercise Prices |
|
|
Number Outstanding |
|
|
Weighted Average Remaining Contractual Life |
|
|
Weighted Average Exercise Price |
|
|
Number Exercisable |
|
|
Weighted Average Exercise Price |
| ||||||
|
(US dollars) |
|
|
|
|
|
(in years) |
|
|
(US dollars) |
|
|
|
|
|
(US dollars) |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Share Units
Restricted Share Units (“RSU”) grants are rights to receive shares of the Company's common stock on a one-for-one basis and vest
|
|
|
Number of RSUs |
|
|
Weighted average grant date fair value (USD) |
| ||
|
|
|
|
|
|
|
| ||
|
Unvested at January 1, 2020 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Canceled |
|
|
( |
) |
|
|
|
|
|
Unvested at December 31, 2020 |
|
|
|
|
|
|
|
|
The total intrinsic value of RSUs vested during the years 2020, 2019 and 2018 was $
F - 25
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - INCOME TAXES
A.Income Tax Regulations (Rules on Bookkeeping by Foreign Invested Companies and Certain Partnerships and Determination of their Taxable Income), 1986:
As a "Controlled Foreign Cooperation" (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's management has elected to apply Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income)-1986. Accordingly, its taxable income or loss is calculated in US Dollars.
B.Law for the Encouragement of Capital Investments-1959:
Part of the Company’s investment in equipment has received approvals in accordance with the Law for the Encouragement of Capital Investments, 1959 (“Approved Enterprise” status) in three separate investment plans. The Company has chosen to receive its benefits through the “Alternative Benefits” track, and, as such, is eligible for various benefits. These benefits include accelerated depreciation of fixed assets used in the investment program, as well as a full tax exemption on undistributed income in relation to income derived from the first plan for a period of
On April 1, 2005, an amendment to the Investment Law came into effect (“the Amendment”) and has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Privileged Enterprise, such as provisions generally requiring that at least
However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Israeli companies with Approved Enterprise status will generally not be subject to the provisions of the Amendment.
The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the above law, regulations published thereunder and the instruments of approval for the specific investments in "Approved Enterprises". In the event of failure to comply with these conditions, the benefits may be canceled, and the Company may be required to refund the amount of the benefits, in whole or in part, including interest.
In the event of distribution by the Company of a cash dividend out of retained earnings that were tax exempt due to its Approved Enterprise status, the Company would have to pay corporate tax of
The Company has not provided deferred tax liability on future distributions of tax-exempt earnings, as the Company intends to reinvest any income derived from its Approved Enterprise program and not to distribute such income as a dividend. Accordingly, such earnings (amounting to $
In 2008, the Company submitted a request to approve a new plan (fourth plan) as a Privileged Enterprise in accordance with the Amendment to the Investment Law. The commencing year was 2010. The expected expiration year is 2021.
F - 26
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - INCOME TAXES (Cont.)
In 2011, new legislation amending to the Investment Law was adopted. Under this new legislation, a uniform corporate tax rate will apply to all qualifying income of certain Industrial Companies (Requirement of a minimum export of
Under the transition provisions of the new legislation, the Company may decide to irrevocably implement the new law while waiving benefits provided under the current law or to remain subject to the current law.
In August 2013 "The Arrangements Law" (hereinafter—"the Law") was officially published. The following significant changes affecting taxation were approved:
1.
The tax rate on a company in Development area A, effective January 1, 2014 is
2.
The tax rate on dividend distributed, generated from "preferred income" or by a company that has an approved enterprise increased effective January 1, 2014 from
In 2016, most of the Company’s taxable income in Israel is attributable to Preferred Enterprises, with a related tax rate of
C.The New Technological Enterprise Incentives Regime - Amendment 73 to the Investment Law
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("the 2017 Amendment") was published. According to the 2017 Amendment, Technological preferred enterprise, as defined in the Law for the Encouragement of Capital Investments, 1959 ("the Encouragement Law"), with total consolidated revenues of less than NIS
Any dividends distributed deriving from income from the preferred technological enterprises will be subject to tax at a rate of
The Company assessed the criteria for qualifying to a “Preferred Technological Enterprise,” status and concluded that the Israeli entity is entitled to the above-mentioned benefits. The Company implemented the new incentives in its tax calculations starting 2017.
D.The Tax Cuts and Jobs Act, 2017:
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “US Tax Act”) that instituted fundamental changes to the taxation of multinational corporations. The Tax Act includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from
F - 27
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - INCOME TAXES (Cont.)
Foreign-Derived Intangible Income:
The 2017 Tax Act provides tax incentives to U.S. companies to earn income from the sale, lease or license of goods and services abroad in the form of a deduction for foreign-derived intangible income (“FDII”). FDII is taxed at an effective rate of
E.Deferred 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 deferred tax assets are as follows:
|
|
|
As of December 31, |
| |||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
| ||
|
|
|
|
|
|
|
| ||
|
Deferred tax assets: |
|
| ||||||
|
Net operating loss carryforwards |
|
$ |
|
|
|
$ |
|
|
|
Tax credits carryforward |
|
|
|
|
|
|
|
|
|
Reserve and allowances |
|
|
|
|
|
|
|
|
|
Operating lease liabilities, net |
|
| ||||||
|
Deferred tax assets before valuation allowance |
|
| ||||||
|
Valuation Allowance |
( |
) |
( |
) | ||||
|
Deferred tax assets after valuation allowance |
|
| ||||||
|
Deferred tax liabilities: | ||||||||
|
Convertible senior notes |
|
|
( |
|
|
|
|
|
|
Intangible assets |
|
|
( |
) |
|
|
( |
) |
|
Deferred tax liabilities |
|
|
( |
) |
|
|
( |
) |
|
Deferred tax assets |
|
$ |
|
|
|
$ |
|
|
Long-term deferred tax assets:
|
|
|
Year ended December 31, |
| |||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
| ||
|
|
|
|
|
|
|
| ||
|
Domestic |
|
$ |
|
|
|
$ |
|
|
|
Foreign |
|
| ||||||
|
|
|
$ |
|
|
|
$ |
|
|
Under ASC 740-10, deferred tax assets are to be recognized for the anticipated tax benefits associated with net operating loss and tax credits carry-forwards and deductible temporary differences; unless it is more-likely-than-not that some or all of the deferred tax assets will not be realized.
F - 28
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - INCOME TAXES (Cont.)
F.Income before taxes on income included in the consolidated statements of operations:
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
|
|
2 0 1 8 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Domestic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign (mainly US) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
G.Income tax expenses (tax benefits) included in the consolidated statements of operations:
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
|
|
2 0 1 8 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Domestic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign (mainly US) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Deferred |
|
|
( |
) |
|
|
|
|
|
( |
) | |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
H.Tax Reconciliation:
The following is a reconciliation of the theoretical tax expense, assuming that all income is taxed at the ordinary statutory average corporate tax rate in Israel and the actual tax expense in the statement of operations, is as follows:
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
|
|
2 0 1 8 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Net income before taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Statutory tax expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of non-benefited income New Technological or Preferred Enterprises statuses in Israel |
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences, including difference between the basis of measurement of income reported for tax purposes and the basis of measurement of income for financial reporting purposes, net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
Change in tax reserve for uncertain tax positions |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign operations taxed at various rates |
|
|
|
|
|
|
|
|
|
|
| |
|
Foreign Derived Intangible Income benefit |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Tax credits |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Adjustments for previous year’s tax |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Change in valuation allowance |
|
|
| |||||||||
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Actual tax expenses |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
F - 29
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - INCOME TAXES (Cont.)
I.Effective Tax Rates:
The Company’s effective tax rates differ from the statutory rates applicable to the Company for tax year 2020, primarily due to tax credits and foreign derived income benefit in the US.
The Company’s effective tax rates differ from the statutory rates applicable to the Company for tax year 2019, primarily due to tax benefits related to foreign derived income benefit, valuation allowance changes and adjustments for previous years tax, in the US.
J.Tax Assessments:
In 2017 the Parent Company has received final tax assessments for the years 2012-2015 from the Israeli Tax Authorities.
For the US subsidiary, tax years starting 2015 and any tax attributes carryforwards from prior periods remain subject to examination in future periods. The other subsidiaries received final tax assessments through tax years 2012 until 2016.
K.Undistributed earnings of foreign subsidiaries:
The Company considers the earnings of certain subsidiaries to be indefinitely invested outside Israel on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company’s specific plans for reinvestment of those subsidiary earnings. The Company has not recorded a deferred tax liability of approximately $
L.Uncertain Tax Positions:
The taxation of the Company's business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty.
In addition, the Company classifies interest and penalties recognized in the financial statements relating to uncertain tax position under the income taxes line item.
Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against the Company that could materially impact its tax liability and/or its effective income tax rate.
The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. The final tax outcome of its tax audits could be different from that which is reflected in the Company’s income tax provisions and accruals. Such differences could have a material effect on the Company’s income tax provision and net income in the period in which such determination is made.
The following table summarizes the changes in uncertain tax positions:
|
|
|
As of December 31, |
| |||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
| ||
|
|
|
|
|
|
|
| ||
|
Balance at the beginning of the year |
|
$ |
|
|
|
$ |
|
|
|
Increase (decrease) related to prior year tax positions, net |
|
|
|
|
|
( |
) | |
|
Increase related to current year tax positions |
|
|
|
|
|
|
|
|
|
Balance at the end of the year* |
|
$ |
|
|
|
$ |
|
|
F - 30
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - INCOME TAXES (Cont.)
*
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expenses.
M.Income from Other Sources in Israel:
Income not eligible for benefits under the New Technological Enterprise Laws mentioned in ”D” above are taxed at the corporate tax rate of
NOTE 12 - GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
A.Sales by Geographic Area (as Percentage of Total Sales):
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
|
|
2 0 1 8 |
| |||
|
|
|
% |
|
|
% |
|
|
% |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Taiwan, R.O.C. |
|
|
|
|
|
|
|
|
|
|
|
|
|
USA |
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
|
|
|
|
|
|
|
|
|
|
|
|
Korea |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues are attributed to countries based on the geographic location of the customer.
B.Sales by Major Customers (as Percentage of Total Sales):
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
|
|
2 0 1 8 |
| |||
|
|
|
% |
|
|
% |
|
|
% |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Customer A |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer B |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer C |
|
|
|
|
|
|
|
|
|
|
|
|
C. Long-lived assets by geographic location:
|
As of December 31, |
| |||||||
|
2 0 2 0 |
2 0 1 9 |
| ||||||
|
% |
% |
| ||||||
|
|
| |||||||
|
Israel |
|
|
| |||||
|
US |
|
|
| |||||
|
Other |
|
|
| |||||
|
Total long-lived assets (*) |
|
|
| |||||
(*)
F - 31
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 13 - FINANCIAL INSTRUMENTS
A.Hedging Activities
The Company enters into forward contracts, and currency options to hedge its balance sheet exposure as well as certain future cash flows in connection with certain operating expenses (mainly payroll expense) and forecast transactions which are expected to be denominated mainly in New Israeli Shekel ("NIS"). The Company is exposed to losses in the event of non-performance by counterparties to financial instruments; however, as the counterparties are major Israeli banks, credit risk is considered immaterial. The Company does not hold or issue derivatives for trading purposes. The notional amounts of the hedging instruments as of December 31, 2020 and December 31, 2019 were $
B.Derivative Instruments
The fair value of derivative contracts as of December 31, 2019 and December 31, 2018 was as follows:
|
|
|
Derivative Assets Reported in Other Current Assets |
|
|
Derivative Liabilities Reported in Other Current Liabilities |
| ||||||||||
|
|
|
December 31, |
|
|
December 31, |
| ||||||||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
|
|
2 0 2 0 |
|
|
2 0 1 9 |
| ||||
|
Derivatives designated as hedging instruments in cash flow hedge |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The impact of derivative instrument on total operating expenses in the year ended December 31, 2020, 2019 and 2018 was:
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2 0 2 0 |
|
|
2 0 1 9 |
|
|
2 0 1 8 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Loss (gain) on derivative instruments |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
NOTE 14 - LEASES
The Company has operating leases for facilities and vehicles. The Company recognized leased assets of $
For the twelve months ended December 31, 2020, lease expenses were $
|
Year |
|
| ||
|
2021 |
|
| ||
|
2022 |
| |||
|
2023 |
| |||
|
2024 |
| |||
|
2025 |
| |||
|
2026 and thereafter |
| |||
|
Total lease payments |
| |||
|
Less imputed interest |
( |
) | ||
|
Total |
$ |
| ||
Operating cash flows for operating leases for the year ended December 31, 2020 were $
F - 32
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 15 - FINANCING INCOME, NET
|
Year ended December 31, | ||||||||||||
|
2 0 2 0 |
2 0 1 9 |
2 0 1 8 | ||||||||||
|
| ||||||||||||
|
Interest income |
|
|
| |||||||||
|
Financial expense related to the Convertible Senior Notes (Note 16) |
( |
) |
|
| ||||||||
|
Exchange rate loss, net |
( |
) |
( |
) |
( |
) | ||||||
|
Bank charges |
( |
) |
( |
) |
( |
) | ||||||
|
Total |
$ |
|
$ |
|
$ |
| ||||||
NOTE 16 - CONVERTIBLE SENIOR NOTES, NET
In October 2020, the Company issued $
The Convertible Notes are convertible based upon an initial conversion rate of
The Convertible Notes will mature on
1.
During any calendar quarter commencing after the calendar quarter ending on March 31, 2021 (and only during such calendar quarter), if the last reported sale price of the Company’s ordinary shares for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to
2.
During the five business day period after any 10 consecutive trading day period (“measurement period”) in which the trading price, determined pursuant to the terms of the Convertible Notes, per $
3.
If the Company calls such Convertible Notes for redemption in certain circumstances, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
4.
Upon the occurrence of specified corporate events.
On or after July 15, 2025 until the close of business on the second scheduled trading day immediately preceding the Maturity Date, a holder may convert its Convertible Notes at any time, regardless of the foregoing circumstances.
Upon conversion, the Company can pay or deliver cash, ordinary shares or a combination of cash and ordinary shares, at the Company’s election.
The Company may not redeem the notes prior to October 20, 2023, except in the event of certain tax law changes. The Company may, at any time and from time to time, redeem for cash all or any portion of the notes, at the Company's option, on or after October 20, 2023, if the last reported sale price of the Company`s ordinary shares has been at least
F - 33
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 16 - CONVERTIBLE SENIOR NOTES, NET (Cont.)
Upon the occurrence of a Fundamental Change as defined in the Indenture, holders may require the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to
During the year ended December 31, 2020, the conditions allowing holders of the Notes to convert were not met. The Notes are therefore not convertible as of December 31, 2020 and are classified as long-term liability.
The net carrying amount of the liability and equity components of the Convertible Notes as of December 31, 2020 is as follows:
|
December 31, | ||||
|
Liability component: |
2 0 2 0 | |||
|
| ||||
|
Principal amount |
| |||
|
Unamortized discount |
( |
) | ||
|
Unamortized issuance costs |
( |
) | ||
|
Net carrying amount |
| |||
|
Equity component, net of issuance costs of $ |
| |||
Interest expense related to the Convertible Notes was as follows:
|
Year ended | ||||
|
December 31, | ||||
|
2 0 2 0 | ||||
|
| ||||
|
Amortization of debt discount |
| |||
|
Amortization of debt issuance costs |
| |||
|
Total financial expense recognized |
| |||
As of December 31, 2020, the total estimated fair value of the convertible senior notes was approximately $
determined based on quoted price of the convertible senior notes in an over-the-counter market.
F - 34
EXHIBIT INDEX
100
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20‑F and has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
NOVA MEASURING INSTRUMENTS LTD. | ||
|
| ||
|
By: |
/s/ Eitan Oppenhaim | |
|
Eitan Oppenhaim | ||
|
President and Chief Executive Officer | ||
Date: March 1, 2021
101